The reasons for the 25 basis point repo rate cut alone are not convincing

Although a 25 basis point cut in the repo rate was in line with most economists’ expectations, one economist who called for a 50 basis point cut said the reasons for the smaller cut were not convincing.

He responded to the news Inflation decreased by 1% compared to September and fell to 2.8% in OctoberIndependent economic analyst Prof. Bonke Dumisa said he was encouraged by the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) saying this. Repo rate should be reduced by 50 basis points. “There is absolutely no inflation expectation that would justify not reducing the repo rate by 50 basis points.”

After Sarb Governor Lesetya Kganyago announced that the PPC had unanimously agreed on a 25 basis point cut and did not discuss a larger cut, Dumisa said he was not convinced of the reasons for a smaller cut.

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Repo rate reduction in line with Oxford Economics Africa forecasts

But Jee-A van der Linde, senior economist at Oxford Economics Africa, says the cut is in line with his own forecasts. “We agree with Sarb’s view that the external environment has become more challenging and global macroeconomic conditions are characterized by increasing uncertainty.

“Kganyago warned that some global economies with above-target inflation could reverse the policy. South Africa does not fall into this group. “Our adjusted forecasts include higher global bond yields following an upward revision of US neutral interest rates.”

As a result, he said, they foresee a cumulative interest rate cut equal to 75 basis points in 2025, compared to their previous forecast of 100 basis points. “The strengthening US dollar poses a risk to South Africa’s inflation outlook and we expect the rand to remain under pressure in the coming months, with the local unit forecast to reach R18.0/US$ by mid-2025.”

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KPMG agrees with MPC’s reasoning for smaller repo rate cut

Frank Blackmore, chief economist at KPMG, agrees with the governor’s rationale for smaller cuts that there is too much uncertainty in the global economy and that uncertainty is a risk that requires a cautious approach.

“Following the US elections, we saw major appreciations in the Rand and the Sarb increased electricity, water and food prices over the next year; All of this puts upward pressure on inflation in the future. justifies a cautious approach.

“We have currently left the interest rate at 11.25%, reducing it from the highest level of 8.25% to the current 7.75%, and it was emphasized that this trend will continue in 2025 and will depend on the data. by the bank itself.”

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FNB welcomes repo rate cut

FNB CEO Harry Kellan welcomed Sarb’s decision as it will boost consumer and business confidence. “The continued positive outlook for the economy is supported by Sarb’s forecasts for interest rates next year; This will reduce the cost of borrowing and further stimulate economic growth.

“The end of the year is usually a time when spending increases, some of which is financed through loans or credit card facilities. However, volatility in the Rand exchange rate and rising bond yields in many developed economies in recent weeks may lead to fewer rate cuts next year.”

While it is too early to speculate on the impact of new US policies on South Africa, Kellan says some significant changes can potentially be expected early next year. “We especially urge our customers who use debt and mortgage loans to consider keeping their payments at current levels instead of reducing their payments in line with lower interest rates if their budgets allow. “There will be significant savings in interest costs throughout the term of the mortgage loan.”

FNB chief economist Mamello Matikinca-Ngwenya points out that the US Fed has signaled a slower interest rate reduction cycle, which will put pressure on emerging markets such as South Africa.

“Additionally, trade restrictions and looser fiscal policy remain risks to the global inflation and financial conditions outlook. “Given the forward-looking nature of inflation targeting, these factors should contribute to the MPC’s assessment of the necessary restrictiveness of monetary policy.”

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Did PPC act prudently with the repo rate cut?

Sanlam Investments chief economist Arthur Kamp also expected a 25 basis point repo rate cut. “This is a good indicator and given current information, we can expect further disruptions in 2025, but we need to be mindful of potential risks from geopolitical developments or changes in US economic policy.”

Kim Silberman, economist and macro strategist at Matrix Fund Managers, says MPC is being cautious. “Sarb justified its decision by citing uncertainty and medium-term risks in wages, food prices, electricity tariffs (now expected to rise by 13.3% next year and 12.3% in 2026), water and insurance.

“Interestingly, wages are a cause for concern, even though the Bureau of Economic Research (BER) has reduced 2-year inflation expectations to 4.8% and Sarb predicts these expectations will fall further from current levels.”