The recent decision by the South African Reserve Bank (SARB) to reduce the repo rate by 25 basis points (bps) has sparked debate among economists. While this move aligns with the expectations of most, some experts argue that the reasons provided by the Monetary Policy Committee (MPC) are insufficient given the current economic climate.
A Modest Cut Raises Questions
On November 16, 2023, the SARB’s MPC, led by Governor Lesetya Kganyago, unanimously agreed to cut the repo rate from 8.00% to 7.75%, reflecting a 25 bps reduction. This change, while relatively small, aimed to boost economic activity and ease borrowing pressures on consumers. However, independent economic analyst Professor Bonke Dumisa criticized the decision, arguing that a larger 50 bps cut would have been more appropriate. He pointed out that the recent drop in inflation, from 3.8% to 2.8% between September and October, removed any compelling justification for a conservative approach.
Dumisa’s stance is that the South African economy requires a more aggressive rate reduction to stimulate growth amid an environment of low inflation and stagnant economic performance.
Supporting the 25 bps Cut
Despite some criticism, several economists support the cautious 25 bps cut. Jee-A van der Linde from Oxford Economics Africa noted that the SARB’s decision aligns with their forecast, emphasizing the unpredictable global economic conditions. He highlighted factors such as rising global bond yields and a stronger U.S. dollar, which could put pressure on South Africa’s inflation outlook. Van der Linde mentioned that the Rand is expected to weaken, potentially reaching R18.0/US$ by mid-2025, which adds complexity to monetary policy decisions.
This global uncertainty is why SARB chose a more measured response, according to Van der Linde. The SARB’s decision reflects concerns about potential international economic instability, including fluctuating U.S. monetary policy and evolving geopolitical tensions.
Local Support for a Cautious Approach
Frank Blackmore, the lead economist at KPMG, also defended the MPC’s cautious stance. He acknowledged that the decision was influenced by domestic challenges, such as anticipated hikes in electricity, food, and water costs, all of which could contribute to higher inflation. Blackmore emphasized that reducing interest rates too quickly could pose risks, considering the uncertain future of both the local and global economies.
Despite the modest cut, Blackmore and other experts anticipate further rate reductions in 2025, depending on how inflationary trends evolve and the economy responds.
Banking Sector Reactions
The banking sector has generally welcomed the decision, viewing it as a positive step for consumer confidence. First National Bank (FNB) CEO Harry Kellan believes the rate cut will uplift both consumer and business sentiment, especially as the year-end approaches—a period often associated with increased spending. He suggested that reducing interest rates could lower borrowing costs and potentially drive economic growth. However, he cautioned that the Rand’s volatility and global interest rate trends might limit the extent of future rate cuts.
Similarly, FNB Chief Economist Mamello Matikinca-Ngwenya highlighted that the U.S. Federal Reserve’s slower pace of interest rate cuts will likely impact emerging markets like South Africa. She warned that lingering uncertainties about global trade, inflation, and financial conditions must be carefully monitored to avoid economic instability.
Global Factors Influencing the Repo Rate Decision
The SARB’s decision to opt for a smaller rate cut reflects a broader caution linked to international developments. Arthur Kamp, Chief Economist at Sanlam Investments, agreed that the 25 bps reduction was a balanced choice given the unpredictable global landscape. Factors like shifting U.S. economic policies, inflationary trends, and geopolitical risks make a cautious monetary approach prudent.
Economist Kim Silberman from Matrix Fund Managers also supported SARB’s cautious move, citing concerns about future wage increases and expected rises in food and utility prices. Although domestic inflation expectations remain moderate, international uncertainties necessitate a careful balancing act by the SARB to maintain economic stability.
Future Outlook and Implications
Looking ahead, the SARB has hinted at further repo rate cuts in 2025, but these decisions will be data-driven and closely tied to economic indicators. Economists expect the SARB to continue exercising caution as global factors, such as U.S. interest rate policies and geopolitical tensions, play a significant role in shaping South Africa’s economic trajectory.
While some analysts argue that a larger rate cut would have better stimulated the economy, SARB’s conservative approach reflects a desire to navigate the uncertainty with a steady hand, balancing domestic growth needs with international risks.
The decision to cut the repo rate by only 25 bps has ignited discussions among economists, highlighting differing perspectives on the best path forward for South Africa’s economy. While some advocate for bolder cuts to invigorate economic growth, others emphasize the need for caution given the complex and uncertain global environment. As 2025 approaches, the SARB’s next moves will depend on a careful analysis of both local and international economic trends.
