SARB Cuts Rates by 25bp

A welcome relief for consumers

By Reza Hendrickse, Portfolio Manager

In a widely expected move, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) lowered its policy rate today by 0.25%, from 8.25% to 8.0%. This is the first interest rate cut since mid-2020 and offers welcome relief to consumers who may be starting to feel the pinch. The rate cut comes in the wake of yesterday’s Consumer Price Index (CPI) data release, which showed year-on-year inflation edged lower to 4.4% in August, now below the SARB’s 4.5% target level.

Overnight the US Federal Reserve, which like the SARB has been cautious in responding to falling inflation, lowered the Federal Fund’s Rate by 0.5%. Although inflation in the US is not yet back at target levels, the US Fed is responding to signs of weakness in the labour market, given its dual mandate of both price stability and maximum employment.

We expect further rate cuts from both the US Fed and the SARB over the coming quarters, however the pace of interest rate cuts is an open question. The SARB considers our neutral rate of interest to be around 7.0%, potentially implying four more 0.25% cuts before we settle at neutral. Fixed interest markets are currently pricing in that we will reach this by the end of 2025.

Lower rates bode well for the domestic economic growth outlook. Although growth has been sluggish so far this year and marginally below the SARB’s expectation, we expect growth to pick up going forward. This is partly a function of a more stable electricity grid, addressing logistics challenges, and rising confidence post the newly formed GNU. While it is still too early to gauge whether SA is on a structurally higher growth path, we believe there is ample potential for at least a multi-year cyclical upturn.

The PPS multi-asset portfolios have held a healthy allocation to cash, having benefitted from the sustained higher yield environment. We have however been increasing SA growth asset exposure considering the improved domestic outlook, which we believe is a credible catalyst for unlocking attractive domestic equity market valuations. Domestic bonds on the other hand have run hard and may be due for a period of consolidation.