Africa-Press – South-Africa. Following a surprise drop in inflation in August, some economists believe South Africa could see two more cuts to interest rates this year—with the first potentially hitting tomorrow.
According to Investec Chief Economist Annabel Bishop, cooler inflation of 3.3% in August—against expectations of a rise to 3.6%—has increased the chances of a 50 basis point cut in 2025.
However, this is unlikely to happen all at once.
Bishop says the bank is now betting on a 25 basis point cut this week with a chance for another 25 basis point cut in November.
“The SARB is still only likely to deliver a 25bp cut tomorrow, and not a full 50bp move, but the chance will grow for a 25bp cut in November,” she said.
Investec has been particularly bullish about interest rate cuts, having pencilled in a 25 basis point for the Monetary Policy Committee’s (MPC’s) September or final November meeting.
Other forecasters have had more muted expectations, with most anticipating a hold on rates. However, the cooler inflation has also likely caught them by surprise.
Most predictions from banking and finance groups for a hold on interest rates this week were premised on inflation ticking higher, and the Reserve Bank looking for the figure to move towards its new preferred 3% target.
The broader market view is that the SARB won’t cut rates further while it moves to target 3%, with some views on the extreme end forecasing a hold on interest rates until 2027.
According to Nedbank, the Reserve Bank has already given guidance on its 3% targeting, saying it believes it will take time to anchor inflation expectations at this point.
“Consequently, there will be an adjustment period. During this transition, (the SARB) will approach spells of rising inflation like they have always done,” the group said.
“They will consider the sources of upward pressure and the risks of persistence. If they are reasonably
confident that the pressures are isolated and temporary, they will look through the upturn without adjusting monetary policy.”
Conversely, if the central bank sees evidence of secondary effects or persistence, it will adjust interest rates accordingly.
3% target is the key
Investec Chief Economist, Annabel Bishop
Nedbank said that, at this stage, the drivers of inflation appear relatively isolated and temporary in nature, and “we do not expect meaningful or sustained secondary price effects”.
Thus, the group said that an upswing in inflation would likely be met with a hold on interest rates as the Reserve Bank “looks through” rising prices.
However, it added that if inflation cools and the rand strengthens more than anticipated, “the upward pressure on inflation could fall away relatively quickly and open the door to further easing”.
Following the lower inflation data, Nedbank said that the MPC move on Thursday will be a close call.
The group still believes that inflation will increase in the near term, but it will remain relatively muted, averaging around 3.3% in 2025.
Thereafter, it is expected to rise to an average of 4.3% in 2026, before gradually moderating towards 3% during 2027, the bank said.
The key factor here is that, even though inflation was cooler than expected, it is still above the 3% target.
However, other market factors, like the stronger rand and the US Fed moving towards a potentially rapid cutting cycle to stave off economic decline, support a cut.
“Given the mild inflation outlook, tomorrow’s MPC decision will be a close call,” Nedbank said.
“With inflation rising from the SARB’s preferred 3% anchor, our base view is that the MPC will leave interest rates unchanged,” it said.
“However, the rand’s recent rally and the likely further easing in US monetary policy have improved the odds of another rate cut.”
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