Africa-Press – South-Africa. While there is still a chance that the Reserve Bank may cut South Africa’s interest rates at its last meeting of the year, the central bank finds itself in a tricky position, trying to balance growth and inflation targeting.
The Reserve Bank is expected to remain highly cautious in the face of rising inflation, which, although marginal, could impact its plans to lower the country’s inflation target.
All eyes are now on the Reserve Bank’s Monetary Policy Committee’s (MPC) next move, with the United States Federal Reserve having implemented another rate cut at its October meeting.
On Wednesday, 29 October, the US Fed cut rates by another 25 basis points, marking the second interest rate cut for the world’s largest economy since December 2024.
Citadel chief economist Maarten Ackerman explained that the Fed needs to make a decision about the weakening job market and weigh that up against sticky and potentially high inflation.
“So, at this point in time, it seems like they’re more comfortable dealing with some inflationary pressure, but would definitely want to address the deterioration they are seeing in the job market,” he said.
Nedbank chief economist Nicky Weimar previously explained that, historically, when the Fed has been faced with a decision between lower growth or higher inflation, it has opted for the latter.
In the past, the United States has more often responded to lower growth by cutting interest rates, rather than weathering the storm of slower economic growth with higher rates.
While global interest rate trends factor into the MPC’s monetary policy decisions, Ackerman said the Reserve Bank is following its own approach.
For example, despite the United States Fed having cut rates at its meeting in September, the Reserve Bank’s MPC did not, opting instead to keep rates unchanged.
“Our governor and monetary policy committee didn’t act in line with the US, so they continue to follow their own approach at this point in time,” Ackerman said.
Therefore, while a rate cut is not off the table for the MPC’s next meeting on 19 November, the factors influencing the decision extend far beyond the US Fed’s moves.
Moving target
Finance Minister Enoch Godongwana
Ackerman explained that he expects more rate cuts ahead in the South African cycle, adding that another cut before the end of this year is likely.
However, he also noted that Reserve Bank Governor Lesetja Kganyago is highly focused on keeping inflation contained.
This focus, combined with the proposal to drop South Africa’s inflation target to a single, lower number, makes it unlikely that the US Fed’s latest cut will influence the MPC’s policy going forward.
The longer the decision to officially change South Africa’s inflation target is delayed, the more difficult it is to predict the Reserve Bank’s next move.
Talks between the Reserve Bank and the National Treasury on this topic have dragged on for months, with an official decision now expected at the Medium-Term Budget Policy Statement (MTBPS) on 12 November.
Experts widely expect that Finance Minister Enoch Godongwana will announce a new target of 3%, which would bring South Africa more in line with its global peers.
In the meantime, the Reserve Bank has announced that it would now prefer inflation to settle around the lower end of its official target range of 3% to 6%.
While not an official change, this preference influences the MPC’s monetary policy decisions, with the committee expected to remain hawkish in the face of rising inflation to ensure it remains at this lower target.
In addition, the Reserve Bank knows that keeping inflation at this lower target will prove highly valuable when the target is officially lowered.
This is because, in order for inflation to settle around the new, lower target, interest rates may need to be higher for longer, which would constrain the country’s growth.
However, if the inflation rate and inflation expectations are already close or at the new target, monetary policy may not need to be as tight, minimising its impact on growth.
Many experts attributed the MPC’s decision to keep rates unchanged at its last meeting to this narrow window of opportunity.
Several critics also slated this decision, saying the country’s inflation is low enough to justify another rate cut and that the economy needed the boost of an interest rate reduction.
Therefore, the Reserve Bank is treading a fine line between maintaining inflation at its current low levels while attempting not to constrain economic growth too much.
On a tightrope
In its latest Monetary Policy Review, the Reserve Bank noted the thin margin it plays in when aiming inflation at a specific target.
In 2017, the Reserve Bank announced that it would aim for inflation to settle around the midpoint of its target range, 4.5%.
After this decision was announced, it found that between the third quarter of 2017 and the second quarter of 2025, headline inflation averaged 4.7% with a standard deviation of 1.3%.
Assuming that this deviation remains unchanged, “normal” oscillation around the new 3% target should be around 0.9 percentage points.
Therefore, the bank explained that for the target to be robust, inflation must not deviate by more than 1 percentage point from the 3% inflation target.
This gives the Reserve Bank a very thin margin to work with and could explain its cautious stance in the face of seemingly minor upticks in inflation.
South Africa’s latest inflation print for September showed a marginal increase in inflation, reaching 3.4% compared to 3.3% in August.
The Reserve Bank currently expects headline inflation to average 3.4% in 2025, and 3.6% next year, before reverting to 3% during 2027.
Investec chief economist Annabel Bishop said there is a 60% chance of a 25 basis point cut factored in for the MPC’s upcoming 19 November meeting.
Notably, this meeting is taking place a week after Godongwana’s MTBPS on 12 November, when an official announcement regarding the inflation target is expected.
Following the November decision, Bishop said financial markets are only factoring in one more cut by eight months’ time, as their expectations of the pace of rate cuts has slowed.
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