‘The repo rate cut: what does the MPC know that we don’t?’ asks Chris Harmse
South African financial markets ended the week on a positive note as investors welcomed the Monetary Policy Committee's (MPC) decision to cut the repo rate by 25 basis points to 7.75%. This conservative approach by the monetary authorities was mostly expected and discounted by the financial markets from the beginning of the week.
The annual inflation rate, measured by the Consumer Price Index (CPI), dropped significantly from 3.8% in September 2024 to 2.8% in October, following a 0.1% month-on-month decline in the index. The primary driver of this sharp decrease was the transport category, which recorded a 5.3% year-on-year decline, largely due to fuel prices being 20% lower than a year ago. This reduction in transport costs contributed -0.8 percentage points to the CPI basket and was the main factor behind the lower inflation rate.
Conversely, housing and utilities (up 4.8%, contributing 1.1 percentage points) and food and non-alcoholic beverages (up 3.6%, contributing 0.7 percentage points) remain the primary drivers of inflation, together accounting for 1.8 percentage points of the total annual rate of 2.8%.
Analysts and economists were a bit surprised that the MPC did not lower the repo rate by 50 basis points. One may ask the question if the MPC may know information that we don’t?
At a news conference last Thursday, Reserve Bank Governor Lesetja Kganyago announced a second consecutive cut in the central bank’s interest rate, reducing it to 7.75%. This adjustment brings the prime lending rate of commercial banks down to 11.25%. Kganyago said, “Over the past two months, new inflation pressures and heightened uncertainty suggest diminished policy space.”
The governor noted that although the current inflation rate is below the lower target of 2.0% and well below the unofficial midpoint target of 4.5%, several significant upside risks to inflation remain. In the short term, upward pressure on prices for food, electricity, water, and insurance is likely to drive inflation higher. A second risk arises from expectations of wage increases. Of particular concern are potential government wage settlements, which could significantly exceed both the current inflation rate and official targets. Additionally, the alarming prospect of electricity price hikes—potentially tripling current inflation rates—poses a further challenge.
The Monetary Policy Committee (MPC) is also wary of global geopolitical threats that could exert renewed pressure on oil prices and the rand. Implicit in their concerns are the ongoing Russia-Ukraine conflict, the Israel-Hamas war and lingering uncertainties surrounding US foreign policy frameworks shaped during the Trump administration.
The identified risks worrying the MPC itself are cost inflation factors and by not lowering the repo rate with magnitudes of 0.5% it will do the consumer even more harm. The MPC, however, does indicate that the repo rate is likely to be decreased by at least another 75 basis points to 7.0% over the next few months. This raises a critical question: does the South African Reserve Bank’s primary mandate—to safeguard the currency’s value in the interest of balanced and sustainable economic growth—still hold significant influence?
The All Share Index on the JSE gained 2.0% over the week, with a notable 1.0% surge on Wednesday following the announcement of the inflation rate.
On the foreign exchange market, the rand showed strong recovery against major currencies last Monday. The rand-dollar exchange rate dipped below the R18.00/$ mark, reaching R17.95/$, for the first time since Donald Trump was elected the President of the US. However, the US dollar gained strength during the week, bolstered by the Trump administration's stance on China and the war in Ukraine.
As a result, the rand gradually lost ground over the following four days, closing at R18.11/$ on Friday.
This coming week, investors will focus on key economic data releases. On Tuesday, the South African Reserve Bank will publish the country's Leading Business Indicator. Statistics South Africa is set to release the Producer Price Index on Thursday. Following September's sharp decline in producer price inflation to just 1.0%, analysts expect a further decrease to 0.5% in October.
Globally, attention will turn to the U.S. Federal Reserve, which will release the minutes from its November Federal Open Market Committee meeting on Tuesday. On Wednesday, the US will issue its second estimate of quarter two GDP growth, along with October's data on durable goods orders, personal income and spending.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT