The return of Donald Trump as president of the United States, along with the uncertainty surrounding its global economic impact, is unlikely to deter the South African Reserve Bank (Sarb) from cutting interest rates on Thursday.
The central bank will hold its Monetary Policy Committee (MPC) meeting – the last of the year – this week, and it is widely anticipated that another 25 basis points will lower the repo rate.
No reason not to cut
Lisette IJssel de Schepper, chief economist at the University of Stellenbosch’s Bureau of Economic Research (BER), notes that concerns about Trump’s policies potentially being inflationary and leading to sustained dollar strength (and a weaker rand) make a 50 basis point rate cut in South Africa unlikely.
However, these uncertainties are not expected to prevent the Sarb from implementing a rate cut altogether. She notes that there are sufficient reasons for the Sarb to proceed with a 25 basis point reduction on Thursday.
At its September MPC meeting, the central bank reduced its repurchase rate (repo rate) by 25 basis points to 8%, marking the first cut since the global economic fallout from COVID-19 four and a half years ago. During that meeting, Sarb Governor Lesetja Kganyago highlighted the uncertain geopolitical environment and potential inflationary shocks due to trade restrictions as factors influencing the central bank’s cautious approach to its rate-cutting cycle.
Casey Sprake, an investment analyst for fixed income at Anchor Capital, agrees that South Africa will likely see another 25 basis point interest rate cut. “And from there on, we’ll probably see 50 to 75 basis point cuts in 2025,” she tells Moneyweb.
“Our base case hasn’t changed even with all the noise going on in the US. We always said it will be a narrow-cutting cycle, and the US is also moving closer to that narrative.”
Federal Reserve Chair Jerome Powell has indicated that the US economy is performing well, allowing the central bank to lower interest rates at a “careful pace”, according to Bloomberg.
In September, the Fed surprised markets with an aggressive half-percentage-point cut, followed by a quarter-point reduction at the beginning of November. Powell did not mention the possibility of a rate cut in December.
Sprake suggests that the Sarb will likely “stretch out” further rate cuts during 2025, with intervals in between as new data emerges. “The timing of the cuts [is] uncertain though,” she adds.
Shallower rate cut outlook
Annabel Bishop, Investec’s chief economist, believes that after the expected 25 basis point cut on Thursday, there could be one more rate cut in January 2025. “But after that, there will be only one more cut of 25 basis points by the end of 2025.”
She wrote in a company note that the markets anticipate a shallower outlook for South Africa’s interest rate cuts, driven by concerns over a lower inflation target of 3%.
Kganyago has consistently supported a downward revision of the country’s inflation target, as the current 3% to 6% range is misaligned with global standards.
According to Bishop, overall, risks are elevated for the coming year, particularly with the uncertainty surrounding US monetary policy. Additionally, the Fed may pause its rate-cutting cycle at its January Federal Open Market Committee meeting.
Inflation moderation in South Africa, which is expected to be around 4.1% for October, supports another 25 basis point cut.
Statistics SA will publish the figures for October on Wednesday, 20 November.
