South African Reserve Bank (SARB) Governor, Lesetja Kganyago has maintained that the interest rates cutting cycle in the country will continue to be dictated by “domestic idiosyncrasies” in spite of emerging markets central banks cutting rates.
The SARB last month decided to cut the borrowing costs by 25 basis points, from 8.25% to 8.00% per annum, for the first time in four years after interest rates remained elevated at a 14-year high for a prolonged period of time.
The SARB was encouraged by the headline consumer inflation declining to 4.4% in September, below the 4.5% midpoint of its 3-6% target range.
Presenting the SARB’s annual report before the Standing Committee on Finance in Parliament yesterday, Kganyago maintained that the central bank would focus on domestic factors more than what is happening in peer markets.
“The other countries’ central banks are in an easing cycle. The US is by 50 basis points, Europe by two sets of 25 basis points, the UK by a total of 50 basis points too,” Kganyago said.
“Emerging markets central banks are also cutting rates but domestic idiosyncrasies are dictating policy choices.”
Kganyago noted the different rate-hiking trajectories of central banks globally. The SARB has recently faced fierce criticism for not cutting rates aggressively after keeping them elevated for a prolonged period of time.
With the SARB’s history of keeping rates relatively stable during a period of global monetary tightening, Kganyago asserted that the South African economy remained on a distinct path.
He said Brazil’s policy rates remained elevated as they were amongst the first central banks to start hiking interest rates in 2021 and their policy rates remain elevated.
However, he said Brazil was also amongst the first central banks to start cutting rates as they started cutting rates in 2023 after they peaked at just below 14% and stayed there for a protracted period of time.
“What is very interesting is that they are most recent to start reversing those cuts and they started to hike rates again. You can see the same picture with Colombia, the similar picture in Latin America with the exception of Chile, which has been able to cut rates quite aggressively,” Kganyago said.
“The reason [is that] Chile runs a very tight fiscal policy stance but they have also benefited from inflation that declines far more rapidly than their Latin American peers and as a result of that they have been able to cut the policy rates aggressively.
“Whilst we hiked rates starting in 2022, it was nothing compared to the other countries that you have seen. Other countries went into double digits and our top was 8.25% in terms of the policy rates. That enabled us to keep it steady for a long period of time whilst the others were still hiking and then we started cutting rates in September this year.”
“You will see that there is a variety and all of that reflects domestic policy choices that central banks actually face. As I said, global growth has been steady and it has been weighed in by continued weak industrial activity and growth peaked post-COVID. Global growth peaked at around 6% and declined and is now steady at around 4%.”
Nedbank economist Liandra da Silva said the domestic economy fared slightly better in the second quarter of 2024, with easing structural constraints, falling inflation, and rising real incomes supporting production and consumption.
Da Silva said the main boost came from a rebound in domestic demand, which offset a renewed deterioration in the country’s net export position.
“We expect the economic recovery to continue and broaden in the second half of the year. Electricity supply is expected to remain stable, while transport bottlenecks should ease further, albeit only modestly,” she said.
“These gradual improvements, coupled with reduced political risks following May’s peaceful election and the subsequent formation of a government of national unity (GNU), will likely support higher production and exports in the quarters ahead. Even so, the momentum will come mainly from consumer spending as lower inflation boosts real disposable incomes, falling interest rates gradually reduce debt service costs, and withdrawals of contractional savings through the 2-pot retirement system help repay debt and lift spending.
“Headline inflation is forecast to remain around the Reserve Bank’s 4.5% target over the next 2 years, creating space for further monetary easing. We expect the repo rate to decline from 8% currently to 7.75% by end-2024 and 7% by end-2025.”
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