SARB poised for deeper interest rate cuts as inflation hits new lows

South African Reserve Bank Governor Lesetja Kganyago. Last month, the SARB cut interest rates by 25 basis points, the first rates cut in four years, bringing down the repurchase rate to 8% per annum and the prime lending rate to 11.5% per annum. Picture: Thobile Mathonsi/Independent Newspapers

South African Reserve Bank Governor Lesetja Kganyago. Last month, the SARB cut interest rates by 25 basis points, the first rates cut in four years, bringing down the repurchase rate to 8% per annum and the prime lending rate to 11.5% per annum. Picture: Thobile Mathonsi/Independent Newspapers

Published Oct 24, 2024

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Cash-strapped consumers in South Africa could as the South African Reserve Bank (SARB) is expected to cut borrowing costs by a significant 0.5% in the final Monetary Policy Committee (MPC) meeting for the year next month.

This comes after the annual consumer headline inflation plunged to its lowest in 3-and-a-half years in September on the back of slowing fuel prices and stronger rand exchange rates.

Data from Statistics South Africa (StatsSA) yesterday showed that the annual inflation rate fell for a fourth consecutive month to 3.8% in September, down from 4.4% in August.

This is the lowest inflation print since March 2021 when the rate was 3.2%, and was below forecasts of between 3.9% and 4.1%.

Dr Elna Moolman, Standard Bank Group head of South Africa macroeconomic research, said a significant decline in consumer inflation in September was widely expected and of course provided significant relief to consumers.

However, Moolman noted that a slight increase in oil prices had started, slight depreciation in the round exchange rates from its strongest levels, saying October was likely to be the bottom of this inflation cycle with a slight increase in inflation projected from November.

“But general inflation pressure also remains quite benign and we expect that inflation will trend around the middle of the Reserve Bank’s 3-6% inflation target in the medium term,” Moolman said.

“That of course provides scope for the Reserve Bank to cut interest rates further and therefore provide additional relief to the economy.”

Last month, the MPC cut interest rates by 25 basis points, the first rates cut in four years, bringing down the repurchase rate to 8% per annum and the prime lending rate to 11.5% per annum as headline inflation fell below the SARB’s midpoint of the 3-6% target range.

Frank Blackmore, lead economist at KPMG, said the main reason for the inflation decline in September was the reduction in transport costs with both the strengthening rand and drop in global fuel prices underpinning the result.

“This reduction would allow the SARB to reduce rates further at their November meeting, potentially by 50 basis points, even though a 25 basis points remains more likely, continuing their steady reduction cycle into 2025 to a level of around 7% (prime at 10.5%).

“Reductions will continue to put money in the pockets of consumers and give businesses an incentive to increase the rate of investment, resulting in higher economic growth and employment creation.”

On a monthly basis, prices increased by 0.1% between August and September.

Core inflation, which excludes food, non-alcoholic beverages, fuel and energy prices, remained unchanged at 4.1% .

StatsSA’s chief director for price statistics Patrick Kelly said softer transport inflation – specifically lower fuel prices – was the main drag on the headline rate.

“The transport category entered deflationary territory for the first time in 13 months, with the annual rate falling from 2.8% in August to -1,1% in September,” Kelly said.

“Fuel prices dropped for a fourth successive month and are on average 9.0% lower than a year ago. A litre of inland 95-octane petrol was R22.19 in September, the lowest price since February 2023 (R21.68). Price increases for vehicles have also slowed; the annual rate was 3.6% in September 2024, down from a high of 8.4% in September 2023.”

However, the price of Brent crude jumped briefly in the first week of October, reaching $80 per barrel after Iran fired ballistic missiles at Israel.

It has since retreated to around $75 per barrel as retaliation concerns subsided somewhat, and also due to subdued global demand and ample supply.

Nedbank economist Johannes (Matimba) Khosa said they expected headline inflation to remain contained in the coming months.

Khosa said most downward pressure will still emanate from lower transport costs resulting from low fuel prices.

“The upside on inflation will mainly emanate from food as the impact of drier weather conditions earlier in the year filters through certain food items and due to elevated domestic operating costs. We forecast inflation to end the year at around 4% and average 4.6% in 2024,” Khosa said.

“The risks to our forecast are tilted to the upside due to the price of Brent crude oil, which remains vulnerable to tensions in the Middle East. The biggest concern is that Israel could retaliate against Iran, which could potentially disrupt the oil supply channels around that area and result in another surge in the oil price.”

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