Economists are calling for a 50 basis point cut in the repo rate after news on Wednesday that the rate of inflation fell by a whopping 1% in October. They say there are now no inflationary expectations that justify not cutting the repo rate by 50 basis points.

The South African Reserve Bank (Sarb) has the constitutional mandate to protect the value of the rand by keeping inflation low and stable and uses interest rates to influence the level of inflation. To protect the value of the rand, the sarben currently uses inflation targeting to maintain consumer price inflation between 3% and 6%.

Professor Bonke Dumisa, an independent economic analyst, says inflation drops to 2.8% in October which announced by Statistics SA is very encouraging, especially compared to the impressive 3.8% in September.

“This encourages me to say that tomorrow (November 21) the South African Reserve Bank’s (Sarb) Monetary Policy Committee (MPC) must announce a 50 basis point cut in the repo rate from 8% to 7.5%. There are absolutely no inflationary expectations that justify not to lower the repo rate by 50 basis points.”

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Sarb has ample justification to lower the repo rate by 50 basis points

Independent economist Elize Kruger agrees with him. She says that with inflation this low and the repo rate at 8.0%, the real repo rate is 5.2%, which is exceptionally restrictive for an economy running at or below 1% real growth.

“Even if the average in 2024 is considered to be 4.4%, this implies a real repo rate of 3.6%, which is close to a full percentage point above the sarben’s perceived neutral rate.

“With very gradual cuts of 25 basis points every two months, the real repo rate will remain quite restrictive for some time to come and as such the sarb has good reason to cut the repo rate by 50 basis points at the MPC meeting.”

However, she points out that given the recent Sarb rhetoric, the recent depreciation of the rand and a conservative committee, a 25 basis point cut in the repo rate remains the base case forecast. “Apart from the short-term impact on the rand exchange rate (which I believe will fully reverse in the coming months), the impact of the Trump victory in terms of policy changes is likely to be more of a medium-term factor and should not, in my view, track out of local rate expectations in the current cycle.”

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Sarb could easily cut the repo rate by 50 basis points

Frank Blackmore, chief economist at KPMG, says inflation of 2.8% is well below the Sarb’s target level of 4.5%. He also points out that the main contributors to inflation remain housing and utilities, most notably electricity at 11.5%, as well as miscellaneous goods and services that add a percentage point, which includes things like insurance and financial services.

“We see food inflation declining from contributing 0.9% in September to 0.7% this month. Core inflation also fell, excluding food and non-alcoholic beverages, fuel and energy to 3.9%. Given these figures, the sarben would easily be able to cut rates by 50 basis points, but the expectation is probably for another 25 basis point cut and then continuing those 25 basis point cuts into 2025 until we reach the level of around 7% on the repo rate, which is around the long-term sustainable level.”

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Inflation is expected to pick up again in the coming months

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the lower inflation rate of 2.8% in October was broadly in line with their expectations and they still expect Sarben to cut the repo rate by 25 basis points in morning.

“The inflation run has now ended and headline rates will rise gradually over the coming months. We correctly predicted the fall in inflation in October and decimal changes meant our headline forecast of 2.9% was slightly lower. The consensus forecast was for inflation of 3.1%.”

“The October rate of inflation follows a series of favorable inflation surprises but marks the last disinflationary reading as headline inflation will increase gradually from November onwards. However, South Africa’s inflation rate in 2025 will average below the 4.5% we forecast for 2024.”

He says the good inflation outlook means the Sarb can push ahead with its policy easing cycle next year, although there are risks to a slower normalization of US monetary policy, putting emerging market central banks on course for fewer rate cuts.

“Our revised forecast expects 75 basis points of cumulative rate cuts in 2025 compared to our previous forecast of 100 basis points. In addition, a weaker South African rand, mainly due to a stronger US dollar, poses a risk to the inflation outlook.

“The rand has been among the worst performing emerging market currencies since Donald Trump’s election victory. We expect the rand to deteriorate in the coming months, with the local unit forecast to reach R18.0/US$ by mid-2025.”

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The repo rate cut by 25 basis points is expected, with a further 75 basis points in 2025

Johannes (Matimba) Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, say their forecast was for inflation to ease to 3.3%, while the market forecast was 3.2%. they expect headline inflation to start rising in December and throughout next year as the base normalizes.

– Fuel prices will also increase due to a slightly higher global oil price and a weaker rand. In November, the price of Brent crude rose by more than 1% and the rand lost ground against the stronger US dollar, which rallied after Donald Trump won the US election.

“Food prices will also increase as the effects of drier weather conditions earlier in the year continue to filter through to some foods. However, global disinflation and favorable climate conditions will partially moderate the upside in food inflation.”

They believe that improved domestic operating conditions thanks to a stable electricity supply and further efficiency gains in logistics should also help limit input and operating costs throughout the food supply chain. They forecast that inflation will end the year just below 4% and average 4.5% in 2024.

“Upside risks to our forecast increased slightly over the past month. The most significant concern is the likely change in US economic policy over the next four years under the Trump administration, which will put pressure on the rand.

“The persistent geopolitical tensions around the oil-producing regions could disrupt supply channels, resulting in a renewed increase in oil prices. High wage settlements and the possibility of higher-than-expected electricity tariffs and other administered prices could also exert some upward pressure.”

Khosa and Weimar warn that the economic recovery is unlikely to lead to significant demand pressure on prices. “Despite these risks, the inflation outlook remains relatively subdued, with CPI expected to hover around the Sarb’s target of 4.5%. Accordingly, we expected the Sarb to cut rates by 25 basis points tomorrow, followed by a further 75 basis point cut in 2025.”

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MPC will decrease by 25 basis points and remain cautious

Koketso Mano, senior economist at FNB, says inflation was also below FNB’s expectations of 3%. “We see inflation at 3.2% in November and expect inflation to rise steadily to 2025, but not above 4.0%. This trend is supported by positive base effects and subdued underlying inflation.

“At the MPC meeting in September, the Sarb projected inflation to average 4.0% next year and 4.4% in 2026. This benign trend in inflation, together with recent interest rate cuts in advanced economies, supports a continued local tapering cycle.”

Mano says FNB expects a 25 basis point cut at tomorrow’s MPC meeting and at each subsequent meeting until May 2025, but notes the outlook is not without challenges.

“The Fed has signaled that a slower rate-cutting cycle is underway, which will put pressure on emerging market assets.

“Furthermore, trade restrictions and easier fiscal policy remain relevant risks to the outlook for global inflation and financial conditions. These factors should keep the MPC cautious.”