Reserve Bank cuts repo rate by 25 basis points

In a widely expected move, the Reserve Bank’s monetary policy committee (MPC) announced a 25 basis-point cut in its benchmark repo rate on Thursday, lowering it to 8%.

Sustained moderation in inflation over the past few months, a marked improvement in the inflation outlook, and the commencement of rate-cutting cycles by major central banks created space for the Bank to cut rates for the first time since May 2023 when the MPC raised by 50 bps to 8.25%.

Bank governor Lesetja Kganyago said MPC members considered an unchanged stance, a 25 bps cut, and a 50 bps cut.

“[We] ultimately reached consensus on 25 bps agreeing that a less restrictive stance was consistent with sustainably lower inflation over the medium term,” he said.

Kganyago said there had been welcome developments globally such as the recent rate cuts by the European Central Bank, the Bank of England, and the US Fed’s decision on Wednesday night to reduce rates by 50 bps.

But there were still risks and, as a result, central banks were moving “carefully, and policy stances remain relatively tight”.

“The case for caution is further bolstered by the difficult and unpredictable geopolitical environment, with risks of inflationary shocks through trade restrictions and supply chain disruptions,” Kganyago said.

The rand firmed overnight after the Fed decision, reaching a best level of R17.37/$ before the local rate decision, its strongest since February 2023. At 3.40pm it was 0.44% firmer at R17.46/$.

The MPC’s outlook for local growth and inflation has improved since July even as output was marginally below the Bank’s expectations for the first half of the year. The economy showed no growth in the first quarter and expanded just 0.4% in the second quarter.

However, the Bank expects improvements in the second half, with growth of 0.6% in both quarters. “This reflects rising confidence, in part due to a stable electricity supply. We also expect extra spending given withdrawals from the two-pot retirement system.”

For the medium term, the Bank has again lifted its growth projections. It still estimates GDP growth of 1.1% for 2024, however it now sees the economy expanding by 1.6% in 2025 and 1.8% in 2026, up from 1.5% and 1.7% respectively in the previous forecast.

“The upgraded forecast is premised on better functioning network industries, especially electricity, alongside broader reform momentum,” said Kganyago.

Headline inflation eased to 4.4% in August, a three-year low, and below the midpoint of the Banks’ 3%-6% target range.

“Our forecast suggests this progress will be sustained, with inflation contained below the 4.5% midpoint to 2026.”

The Bank lowered its average inflation forecast for 2024 from 4.9% to 4.6%. It expects third quarter inflation to average 4.4% and fourth quarter inflation to average 3.6%.

It forecast inflation of 4% in 2025 (down from 4.4% in the previous forecast) and 4.4% in 2026.

The outlook was supported by the stronger exchange rate and lower oil prices which have resulted in several consecutive months of fuel price decreases, as well as a better food price outlook.

These benefits would be partly offset, however, by higher electricity prices which the Bank expects to increase at a rate of double that of headline inflation.

Update: September 19 2024
This story includes the rand's performance in the wake of the interest rate cut 

erasmusd@businesslive.co.za