MPC cuts rates by 25 basis points

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) lowered its policy rate today by 0.25%, from 8.0% to 7.75%. The Committee’s decision was unanimous, and the cut was widely expected. Yesterday’s CPI announcement, which showed year-on-year inflation falling to a four-year low of 2.8%, meant a follow-up cut was almost guaranteed. At the same time, the SARB’s conservative approach meant anything more than 25bp was extremely unlikely. 

With inflation expected to remain in check over the coming months, we can expect further cuts from the SARB. Interest rates are expected to settle around 7.0% in a year’s time. The SARB has been in synch with the US Federal Reserve, which earlier this month also delivered a 0.25% cut. 

The outlook for rates hinges on the inflation outlook, and some are concerned that Trump’s policies could lead to higher inflation down the line. The potential impact of tariffs is difficult to quantify however, with some disputing that tariffs are even inflationary at all, and rather a once-off price adjustment. 

What most seem to agree on however is that Trump is likely to be positive for the US economy and negative for the rest of the world, particularly emerging markets, whose currencies are likely to trade weaker in the face of strong dollar policies. For now, the SARB remains in a cutting phase, but it is possible rates settle at a higher level than previously thought, prior to Trump’s victory. 

Lower rates bode well for domestic economic growth. Although growth has been sluggish so far this year and below the expectations, we expect growth to pick up going forward. Improved readings across various leading indicators, such consumer confidence, suggests a pickup is brewing.  Unfortunately, Trump’s election has prompted us to temper our enthusiasm for SA somewhat, but we maintain the view that a domestic cyclical recovery is long overdue.