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Wednesday, February 19, 2025

SARB lowers interest rate to 11%

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The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has announced a 25-basis-point cut to the repo rate, bringing it down to 7.25%, effective 31 January 2025. This will bring the prime lending rate (interest rate) to 11%.

 

It’s the third consecutive 25 basis point repo rate cut since September last year.

 

This decision comes against the backdrop of a challenging global economic environment, ongoing inflation risks, and an evolving domestic growth outlook.

 

Global Economic Pressures

 

SARB Governor Lesetja Kganyago highlighted that some of the economic risks flagged in the previous meeting have now materialised.

 

Notably, monetary policy in the United States has shifted, with limited room for interest rate cuts due to persistently high core inflation and the threat of rising trade tariffs. The possibility of further US rate hikes has strengthened the dollar, which, according to some measures, has reached an all-time high.

 

Meanwhile, growth outside the US remains subdued. Europe’s major economies continue to struggle, with Germany experiencing two consecutive years of contraction and sluggish growth in both France and the UK. China’s economy is also slowing, accompanied by very low inflation and declining interest rates.

 

Domestic Economic Outlook

 

South Africa’s economy contracted in the third quarter of 2024, largely due to a sharp drop in agricultural production. However, SARB expects a rebound in the fourth quarter, driven by more stable agricultural output and increased household spending, aided by lower inflation and Two-Pot pension withdrawals.

 

Looking ahead, potential growth is projected to reach 2% by 2027. Since the onset of Covid-19, mining and manufacturing have lagged behind pre-pandemic levels, while the services sector has driven overall economic expansion. Investment has been weak, with household and government spending providing key support. SARB anticipates a shift towards higher investment and recovery in the primary and secondary sectors as growth picks up.

 

Inflation and Interest Rate Projections

 

Headline inflation averaged 4.4% in 2024, dropping to 3% in December, mainly due to lower food and fuel prices. While inflation is expected to remain in the lower half of SARB’s 3-6% target range in early 2025, it is projected to stabilize at around 4.5% later in the year.

 

Despite a weaker rand, the impact on inflation has been minimal, as other price components have remained below previous forecasts. Inflation expectations have also aligned with SARB’s 4.5% midpoint target. However, inflation risks remain tilted to the upside, with global economic uncertainty and domestic administered prices posing key threats.

Policy Decision and Future Outlook

 

The MPC vote was split, with four members supporting the rate cut while two preferred to maintain the existing stance. The committee ultimately decided to ease policy restrictiveness while remaining cautious about the unpredictable global environment.

 

Interest rates are expected to decline slightly over the next few years, but Kganyago emphasized that future decisions will be made on a meeting-by-meeting basis, guided by economic data rather than pre-determined commitments.

 

Potential Scenarios: Trade Wars and Structural Reforms

 

SARB also reviewed possible economic scenarios, including a global trade war. A hypothetical increase of 10 percentage points in US tariffs—triggering retaliatory measures worldwide—would push inflation higher, drive up interest rates globally, and weaken investor confidence. In this scenario, SARB’s model predicts the rand could depreciate to nearly R21 to the US dollar, with domestic inflation rising to 5% and interest rates half a percentage point higher than the baseline forecast.

 

Conversely, SARB examined a scenario of accelerated structural reforms in South Africa, which could boost GDP growth to 3% by 2027 while also lowering inflation and interest rates. This highlights the importance of policy reforms in improving economic stability and reducing the country’s risk premium.

 

Call for Reforms to Sustain Growth

 

Governor Kganyago reiterated that macroeconomic stability must be maintained despite external challenges. “The MPC’s primary role is to ensure low and stable inflation with well-anchored expectations. We remain vigilant and ready to adjust policy as needed,” he said.

 

He emphasized that in addition to monetary policy, other measures are needed to support economic growth, including reducing public debt, improving infrastructure, controlling administered price inflation, and aligning wage growth with productivity gains.

 

 

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