PPS Investments: MPC Commentary

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) lowered the Repo policy rate by 0.25% at today’s MPC meeting, from 7.5% to 7.25%. The decision to cut rates was unanimous, with one MPC member even voting a 0.5% cut.

Unlike the MPC members, the market has been divided regarding a rate cut. Doves have argued inflationary pressures are subdued and real interest rates in SA are therefore too high. As such, there is ample scope to cut rates to support economic growth, without stoking inflation. 

Hawks on the other hand have argued that there is limited room for a cut, given rates are close to the SARB’s neutral level, and global risks are elevated, posing risk to the rand. In addition, although inflation is well below the 4.5% mid-point level, it is currently in the region of where the SARB would like it to be longer term.

The SARB trimmed its GDP projection to 1.2% for 2025. It still views structural reforms as supportive of longer-term growth but acknowledges headwinds from slower global growth. Inflation in SA is running at below 3% year on year, and the SARB has revised lowering its inflation forecast, given oil and rand dynamics, as well as the cancelled VAT hike. 

In his closing comments, the Governor raised the point that the SARB’s work, in conjunction with National Treasury, regarding lowering the inflation objective from 4.5% to 3%, was at an advanced stage. The MPC is advocating for lowering the target which it sees as beneficial over the long term. The market is not entirely convinced however, with some believing it is more important for South Africa to achieve higher nominal growth to ease the debt burden.