As was widely expected, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) decided (by a 4 to 2 vote) on 18 September to again pause its interest rate easing cycle for now.
In commenting on this decision, Prof Raymond Parsons, economist from the North-West University (NWU) Business School, says the MPC saw the risks around the inflation outlook as being balanced, and inflation as now being contained.
“It predicted headline inflation as averaging out at 3,4% in 2025, with core inflation around 3%. On the growth front, the MPC raised its 2025 gross domestic product (GDP) forecast from 0,9% to 1,2%. It cautioned that a much better level of fixed capital formation was needed as a key driver of a healthy growth rate in the future.”
Prof Parsons says that, given the overall balance of risks now facing the South African economy, the minority MPC view was nonetheless right to prefer another cut of a further 25 basis points (bps) in interest rates.
“Positive forces supporting this view would include factors such as average inflation in 2025 now being close to 3%, lower inflationary expectations, an easier United States monetary policy, a stronger rand, and no evidence of demand inflation.”
He says while the decision remained a close call, on the basis of the data available, the minority MPC view wanting to continue the interest rate easing cycle was the better judgement call.
“The cautious stance by the majority of the MPC would therefore seem to be rather linked to wanting to keep rates higher for longer to entrench its preferred lower 3% inflation target. Yet there still seems to be continued uncertain circumstances around moving to the SARB’s preferred lower 3% inflation target.”
Prof Parsons says the SARB also again confirmed that there may be a short-term sacrifice in growth to attain the longer-term advantages of its 3% target.
“A previous joint SARB-National Treasury statement on 1 September indicated that Finance Minister Enoch Godongwana and the SARB ‘are still to agree to any changes in the target’. Deputy Finance Minister David Masondo told an investment conference on 15 September that ‘the existing 3% to 6% target remains operational and that any decision to change it should not be taken lightly’.”
Prof Parsons explains that while there is widespread support that a lower inflation target for South Africa should now be explored, it is therefore not yet entirely clear whether the necessary political support and buy-in have been secured for the inflation target change.
He says the future level of borrowing costs is a crucial area of decision-making for the economy, for which a settled official inflation targeting framework is highly desirable for policy certainty.
“The sooner this is decided, the better,” he concludes.
