With consumer price inflation decreasing for the third consecutive month there is fresh reason to hope for an interest rate cut tomorrow.

Before today, the best outcome that South Africans could expect was for the repo rate to be kept unchanged, but now that inflation has dropped to 5.1 percent there is some optimism for better news.

After all, the South African Reserve Bank (SARB) uses the repo rate to keep inflation under control and within its target range of three percent to six percent.

When inflation rises, the Bank increases the repo rate to curb borrowing and spending; when people borrow less and spend less, it slows down inflation and helps to keep prices lower for everyone. Conversely, low inflation indicates weaker levels of economic activity and so the Bank decreases the repo rate to encourage people to borrow and spend, thus boosting growth.

Based on this, it could be argued that the repo rate, and therefore the interest rate – which is usually set at 3.5 percent higher, should come down. But it is not that simple.

While the latest inflation figure of 5.1 percent is within SARB’s target range, governor Lesetja Kganyago has previously explained that the Monetary Policy Committee (MPC) would rather see inflation closer to the middle of the target band. Furthermore, it does not only take the current level into account but the inflationary risks that lie ahead.

During his meeting address in November, after inflation had dropped to 5.5 percent and the MPC had unanimously kept the repo rate unchanged, he said: “At the current repurchase rate level, policy is restrictive, consistent with the inflation outlook and elevated inflation expectations. Serious upside risks to the inflation outlook remain...

“The policy stance aims to anchor inflation expectations more firmly around the mid-point of the target band and to increase confidence of attaining the inflation target sustainably over time. The MPC will seek to look through temporary price shocks and focus on potential second-round effects and the risks of de-anchoring inflation expectations. Guiding inflation back towards the mid-point of the target band reduces the economic costs of high inflation and will achieve lower interest rates in the future.”

During that address Kganyago also stated that global oil markets were tight and core inflation sticky – meaning that salaries and consumer prices were not responding quickly to changes in demand. Furthermore, despite recent easing in some food price components, domestic food price inflation remained volatile, El Niño conditions presented longer-term concerns, and imported goods inflation had increased during 2023.

“Electricity prices continue to present clear inflation risks, and with logistics constraints, are likely to have broader effects on the cost of doing business and the cost of living. Given uncertain fuel and food price inflation, considerable risk still attaches to the forecast for average salaries.”

For all these reasons, many economists and business experts still believe the repo rate will hold steady at 8.25 percent tomorrow – and the interest rate, therefore, at 11.75 percent.

FNB senior economist Koketso Mano says the MPC will need more evidence that inflation will anchor at the 4.5 percent target before it starts dropping the rate. Unfortunately, heightened geopolitical tensions, biosecurity, as well as adverse weather patterns complicate the deceleration trend in inflation and could prolong the lift in inflation expectations away from target.

“In addition, this year’s elections, and any further fiscal slippage not only risk a weaker rand and further inflationary pressure but would worsen the risk premium required to invest in South Africa, which automatically lifts the estimate on the rate of interest that neither supports nor restricts economic activity (neutral).”

Therefore, he says the MPC is likely to wait at least until the event risk of the elections has passed before lowering the repo rate. FNB’s view is that the first cut could be in the second half of this year, depending on inflation and policy decisions taken by advanced economies.

Seeff Property Group chairman Samuel Seeff, however, feels there is room for the SARB to cut the repo rate by 0.25 percent considering inflation “has dipped to the lowest level in months”. He says the economy and property market are in “desperate need” of a positive injection. But, if the Bank is unable to provide some relief tomorrow, the lower inflation should at least signal a cut at the following MPC meeting in March.

The economy and property market gains of the 2022-year have largely been wiped out by the high interest rate and Seeff feels the Bank has been too hawkish in its stance.

“The high interest rate has done more harm than good and urgent intervention is needed. Given that price growth in the property market has largely stalled, there is little incentive for investors to come into the market right now. Those who need to buy will continue doing so, but we do not expect any fireworks beyond that.”

He adds: “Consumers and homeowners are under pressure and urgent relief is needed. A rate cut can provide energy and impetus ahead of the General Election, but generally, there is a sense that the government needs to come to the party in terms of laying the ground for economic and property market growth. This requires urgent intervention in the form of infrastructure maintenance and development, and especially insofar as making progress to reduce the power outages.”

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