Cape Town - The South African Reserve Bank’s (SARB) decision to cut the repo rate to 7.75% has sparked mixed reaction among economists, raising questions about its potential impact on the struggling economy.
This decision, made by the monetary policy committee (MPC) during its latest meeting, comes as the inflation rate continues to decline, reaching its lowest point since June 2020 at 2.8%.
SARB Governor Lesetja Kganyago emphasised the importance of a cautious approach, acknowledging the potential risks posed by global economic shifts and local pressures.
“In general, monetary policy in major economies remains restrictive, and headline inflation has slowed. While this has provided some room for major central banks to ease rates further, over the past two months, new inflation pressures and heightened uncertainty suggest diminished policy space. With underlying inflation still above target, in several economies, there are risks of policy reversals.
“Against this backdrop, the MPC decided to reduce the policy rate by 25 basis points (bps), to 7.75%, with effect from 22 November 2024.
“The decision was unanimous,” the governor said.
Cape Chamber of Commerce and Industry president, Jacques Moolman, said they were hoping for a bolder move from the Reserve Bank in light of Statistics SA data which shows inflation at a more than four-year low.
“Although the 25 basis points cut was largely as expected, we believe a more substantial cut of 50 basis points would provide a more immediate tonic for much-needed business investment and growth.
“In taking the cautionary approach, SA Reserve Bank Governor Lesetja Kganyago is factoring in uncertainty relating to future price fluctuations.
“However, government should also factor in the urgency required to address the current low economic growth rate and unemployment crisis, which itself creates massive uncertainty,” Moolman said.
Senior economist at the Bureau for Economic Research, Shannon Bold, said the 25bps cut was in line with the consensus forecast ahead of the meeting.
“The MPC has been increasingly emphasising the balance of risks to inflation in making their repo rate decisions. While inflation has moderated and the growth outlook is improving, the MPC remains cautious given the upside risks to inflation, including currency volatility, oil price movements, above-inflation wage settlements, and administrative costs, particularly electricity tariffs.”
Bold added that these considerations will likely continue to influence their cautious approach to cutting the repo rate further.
“For now, we still expect the cutting cycle to deliver a further 75bps (in 25bps increments at the next three meetings), with the repo rate reaching 7% by mid-2025, in line with the SARB’s steady state.”
Economist at Stellenbosch Business School, Professor Andre Roux, said many would have hoped that given the very soft inflation rate, even below the lower edge end of the target range, a 50bps drop would have been justified.
“However, the governor did point out that whilst the inflation rate at the moment might be nice and low, there’s still a danger of an uptick in inflation.
“We have to consider the increase in electricity prices might have a major bearing on inflation.”