Johann Els, Group Chief Economist at Old Mutual Group
As the South African Reserve Bank’s Monetary Policy Committee (MPC) gears up for its meeting on 19 September, expectations are mounting for an interest rate cut. Inflation has eased considerably, with the headline rate dropping to 4.6% in July from 5.1% in June, comfortably within the SARB’s target range. Global economic factors, such as the anticipated US Federal Reserve rate cut just a day earlier, are also adding pressure on the SARB to take a more accommodative stance. With inflation under control and consumer demand remaining subdued, the environment seems ripe for monetary easing, signalling potential relief for South African consumers and businesses.
According to Old Mutual Group Chief Economist Johann Els, the SARB will have room to cut rates at both of its remaining meetings for the year, in September and November. “I expect interest rates to be cut, perhaps more than expected by the market,” Els noted, pointing to the combination of stabilising inflation and the absence of strong consumer demand pressures. The SARB has successfully brought inflation within its target range and with global pressures, particularly from the US, starting to ease, the path for a rate cut seems clear.
Another important consideration is the timing of the US Federal Reserve’s meeting, which will occur just one day before South Africa’s MPC meeting. The Fed is expected to lower rates by 50 basis points, which could set the tone for the SARB’s decision. A rate cut by the Fed could ease global financial conditions, supporting a stronger Rand and providing the SARB with further impetus to further reduce rates. Els highlights this connection, saying, “With the Fed likely cutting rates and local inflation pressures easing, the SARB should be confident in cutting rates at the upcoming meeting.”
Els also explains the intricacies of inflation, noting that while the year-on-year change in inflation shows a reduction, underlying price pressures have been weakening for some time. He points out that “the underlying pace of headline inflation over the last six months sits at just 3.4%, while the last three months show only 1.1%.” The corresponding numbers for core inflation are 4% and 2.8%. This downward trend indicates that inflationary pressures have significantly diminished, especially in core inflation, which excludes volatile items like fuel and food.
Despite these encouraging signs, Els cautions that inflation remains a long-term concern, particularly with fixed basket weightings that don’t capture changes in consumer spending habits. However, he remains optimistic about inflation continuing to fall. “Inflation could drop to around 4.1% in September and below 4% in October – possibly as low as 3.5%,” he said, adding that the SARB could reduce rates by 25 basis points in September and 50 basis points in November, taking the repo rate to 7.5% by year-end.
For South African consumers, this would provide much-needed relief after enduring the highest interest rates in over a decade. Lower rates could spur economic growth, though structural issues such as labour costs and sluggish productivity gains continue to weigh on the economy. Els emphasises that while monetary policy can provide temporary relief, the underlying structural challenges remain a critical issue for long-term growth.
With inflation well under control and the Fed signalling rate cuts, South Africa seems poised for a reduction in interest rates. As Els puts it, “We’ve significantly turned the corner on inflation, and rate cuts must come.” All eyes will now be on the SARB’s meeting on 19 September to see if the central bank follows through on these expectations.
ENDS
