The inflation rate dropped for the fourth consecutive time in September, paving the way for a repo rate cut.
Economists expect that the repo rate will be cut again on Thursday, but not by the 50 basis points many were hoping for due to the stronger dollar after Donald Trump won the US election.
The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) will decide on the repo rate this week, while Statistics SA will also announce the inflation rate for October on Wednesday.
The Sarb has the constitutional mandate to protect the value of the rand by keeping inflation low and steady and uses interest rates to influence the level of inflation. To protect the value of the rand, the Sarb currently uses inflation targeting to maintain consumer price inflation between 3% and 6%.
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BER: repo rate cut of 25 basis points
Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says the BER foresees a further slowdown in inflation largely on the back of a double-digit decline in the petrol price component of CPI.
“The Sarb should welcome the slowdown in inflation, but it will not be the reason for the forward-looking central bank to reduce the repo rate. However, the expectation that inflation should settle around 4.5% over the medium term should prompt another 25 basis points cut in the policy rate.
“While there is still lots of uncertainty around the actual impact on the global economy of a Trump presidency, the concern that his policies could be inflationary and/or lead to a sustained stronger dollar and weaker rand, means that a 50 basis points cut is unlikely. However, it is also unlikely to sway the Sarb from cutting at all.”
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FNB: 25 basis points cut in repo rate
Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say it was obvious that a busy voting calendar across the globe would raise political and fiscal risks from the onset, while maintaining market volatility.
“Our own forecasts at the start of the year were for the MPC to start cutting interest rates in July after South Africa’s election, but these were shifted to November given the volatility in economic data and market reactions and then we shifted our forecast forward to September.
“Our expectations for the MPC’s final meeting for 2024 remain intact for another 25 basis points cut. Like the Fed and the Bank of England (BoE), the Sarb will likely find it too early to consider the practical implications of Donald Trump’s second presidential term and will, in any event, avoid contributing to the political debate.”
They say even while not officially addressing the risk from Trump’s touted policy changes, the MPC will be looking out for potential economic implications.
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Potential risks from Trump’s policy changes
“Firstly, the implementation of extensive US import tariffs and retaliation by targeted countries may keep inflation higher than projected. A curtailment of immigration in the US and increasingly right-leaning advanced economies could also raise the cost of labour.
“Higher inflation could also have an adverse impact on risk assets, with an additional impact on monetary policy in emerging markets. Secondly, looser fiscal policy in the US and other regions that have now become encouraged to spend more on their own defence to either appease the Trump administration or hedge against its foreign policy, may reduce the effectiveness of monetary policy, pushing it to be tighter. There is also a likelihood that global growth is even slower, which would worsen the monetary policy dilemma.”
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Nedbank: another 25 basis points repo rate cut
Nicky Weimar, Johannes (Matimba) Khosa and Isaac Matshego, economists at the Nedbank Group Economic Unit, also expect another 25 basis points reduction in the repo rate as inflation continues to undershoot the Sarb’s 4.5% target and the outlook remains subdued. However, they say, upside risks increased somewhat over the past month.
“Inflation receded further below the Sarb’s target in September. The downward trend is expected to intensify and broaden in October, amplified by another sharp drop in local fuel prices caused by the virtuous combination of falling global oil prices and a stronger rand. We expect headline inflation to fall to about 3.3% in October.”
However, they point out that the upside risks to the inflation outlook increased slightly since the September MPC meeting. “The most significant risk emanates from the likely change in US economic policies during the next four years following Donald Trump’s victory in the US elections.
“The proposed policy mix of tax cuts, tariffs and mass deportation will likely be reflationary and potentially raise the floor on US interest rates over the medium term. The tariff plan also poses significant downside risks to global trade and world growth prospects, with adverse consequences for China’s already struggling economy.”
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Risk of Trump policies
They say given that China is the world’s largest consumer of commodities, the tariff plan could depress commodity prices, weighing export earnings, the terms of trade and therefore, the currencies of many commodity exporting developing countries.
“In addition, the high uncertainty surrounding the future course of US economic policy and foreign relations in a world already beset by tensions and conflicts, will tend to weigh on risk appetites towards emerging markets (EMs) and favour a stronger US dollar, amplifying the downward pressure on emerging market currencies.
“Altogether, we believe that conditions remain supportive of further monetary policy easing. Consequently, we expect another 25 basis points repo rate cut, followed by a further 75 basis points reduction in 2025, taking the repo rate down to 7% and the prime lending rate to 10.50% by the end of next year. If inflation and interest rates align with our forecasts, the real repo rate will remain above 2% throughout 2025.”
