After the surprise decrease in inflation even economists are now starting to wonder if the repo rate could surprisingly be cut tomorrow.
To the surprise of economists, the inflation rate shed 0.2% instead of increasing and now we wonder if the South African Reserve Bank will surprise us on Thursday and cut the repo rate, although economists do not expect it to.
Statistics SA announced this morning that the inflation rate for August decreased by 0.2% to 3.3%, thanks to softer food and fuel prices. The decrease also brings the inflation rate closer to the new official target of 3%.
Jacques Nel, head of Africa Macro at Oxford Economics Africa, says the latest figure confirms their view that inflation pressures remain benign. In addition, he points out that respondents anticipate that inflation expectations for the third quarter will average 4.2% over the next five years, down from a figure of 4.4% reported in the quarter before.
“This is the lowest forecast since the addition of this question to the survey in 2011. Near-term expectations were also down by 0.1% for 2025 to 3.8% and to 4.2% for 2026. While this is still some way from the new preferred inflation target of the South African Reserve Bank (Sarb) of 3%, a surprise 25 basis points cut during the September Monetary Policy Committee (MPC) meeting is still possible. We anticipate the Sarb to hold rates steady for the remainder of the year.”
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Inflation expected to increase again so no cut in repo rate tomorrow
Frank Blackmore, lead economist at KPMG, says the decline in inflation was driven by a slight decrease in the contributions from food and beverages, as well as information and communication. “The moderation in inflation from last month’s 3.5% is a positive development.
“However, inflation is expected to increase in the coming months due to base effects, which may result in no adjustment to the repo rate at tomorrow’s meeting of the MPC because the expectation of inflation is not down to the 3% target level at this point yet and actual inflation is also above that rate.”
Sanisha Packirisamy, chief economist at Momentum Investments says due to third quarter inflation expectations disappointing against the Sarb’s assumption (despite a marked improvement) and inflation expected to inch higher in the coming quarters according to the Sarb’s projection, they maintain their view that the Sarb will likely keep the repo rate constant at 7% at its September interest rate meeting.
However, she says, they acknowledge that the risk is skewed toward a 25 basis point cut. Factors that could drive a cut include:
- The risk of the US Fed cutting interest rates by 50 basis points, rather than the expected 25 basis point cut in its September meeting.
- A more favourable oil price outlook.
- Rand strength against the US dollar.
- Inflation remaining broadly contained.
“Our inflation outlook is unchanged at 3.3% in 2025 and 4.1% in 2026. The Reuters median consensus is pencilling in 3.4% in 2025, 3.9% in 2026 and 3.6% in 2027 in the September Econometer poll.
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Decrease in inflation makes repo rate cut more likely
Arthur Kamp, chief economist at Sanlam Investments, says he was surprised by the decrease in inflation and thinks it is likely to boost expectations of an interest rate cut at the conclusion of this week’s Sarb MPC meeting.
“The odds of an interest rate cut of 25 basis points this week have improved. But despite the encouraging story, a cut this week is not guaranteed. There are also reasons to be circumspect about the extent to which the repo rate is likely to fall over the medium term.”
He says the lower inflation target has not been finalised or confirmed, while inflation and the inflation rate can still increase and higher real interest rates are likely required to guide inflation lower and maintain it in line with the new target.
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Repo rate should remain unchanged for rest of the year – or not?
Koketso Mano, senior economist at FNB, says they see headline inflation lifting slightly to 0.2% month-on-month and 3.4% year-on-year in September. “Fading positive base effects should support inflation, almost touching 4% in the last quarter of this year. This should complicate expectations of further monetary policy easing this year.
“The repo rate should remain unchanged for the remainder of this year but a faster adjustment in pricing behaviour could support the MPC reducing rates quicker.”
Busisiwe Nkonki and Johannes (Matimba) Khosa, economists at the Nedbank Group Economic Unit, say they still expect inflation to trend moderately higher in the months ahead, ending the year at around 4%, with food remaining the primary driver.
“Given the mild inflation outlook, tomorrow’s MPC decision will be a close call. With inflation rising from the Sarb’s preferred 3% anchor, our base view is that the MPC will leave interest rates unchanged. However, the rand’s recent rally and the likely further easing in US monetary policy have improved the odds of another rate cut.”
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Debates about cutting repo rate more habit than substance all over the world
Albert Botha, head of fixed income at Ashburton Investments, says no ink was wasted on the “will they, won’t they” debate surrounding expected changes in interest rate policies by central banks around the world.
“Much of the time, these debates are more habit than substance, filling column inches rather than adding insight. However, the conversations currently dominating headlines fall firmly outside that category.”
Botha says although there are issues to be concerned about, one of South Africa’s bright spots has been the Sarb’s disciplined stewardship of inflation and monetary policy. “Inflation has remained far more contained than in most developed markets, sitting at or below 3% for much of the past 12 months.
“Two elements will likely prove decisive. The first is the near certainty that the US Fed will cut at its next meeting. Betting markets are pricing in over a 90% chance of at least a 25-basis-point reduction. This will provide the Sarb with some manoeuvring room, as the Fed’s lack of cuts since December has certainly limited the Sarb’s options somewhat.
“The second is South Africa’s own balancing act. While inflation remains benign, the persistent absence of meaningful growth cannot be ignored. The Sarb does not operate under an official dual mandate, but “balanced and sustainable economic growth” remains part of its responsibilities in the constitution.”
