Will South Africans be blessed with another interest rate cut this week?
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The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) is set to make its next interest rate decision on Thursday, July 31, and while the prospects of a rate cut appear positive, it's not a clear cut case according to economists.
'The market currently expects a cut in the key repo rate by 25 basis points - which would be the third reduction this year,' said Thys van Zyl, Chief Executive of Everest Wealth Advisory. 'A lower interest rate would bring welcome relief to consumers.'
However he warned that while headline inflation remains relatively low, food price inflation is now at its highest level in more than a year, which poses risks for interest rate expectations as well as consumer spending.
Consumer Price Inflation (CPI) rose to 3% in June, up from 2.8% in May. This was the first time in three months that inflation returned to within the Reserve Bank's 3% to 6% target range. However, CPI remains well below the 5.2% seen this time last year.
Food prices remain higher than expected, particularly red meat thanks to foot-and-mouth disease, yet consumer goods inflation remains subdued.
Johann Els, chief economist at Old Mutual, said the weak overall pricing pressure in the economy justifies a further 0.25 percentage point interest rate cut this week.
ALSO READ: Understanding the impact of rising inflation on SA's interest rates
Dr Elna Moolman, Standard Bank's group head of macroeconomic research, also believes the current inflation rate supports the case for an imminent interest rate cut, and although she expects inflation to rise over the coming months, it should remain 'reasonably benign'.
However, Van Zyl warned that the central bank may be reluctant to cut rates too aggressively if global food and oil prices continue to trend upwards.
'Earlier this year, it was anticipated that the Reserve Bank could cut interest rates one or two more times in 2025. Following the January and May reductions totalling 50 basis points, it's increasingly likely that we'll see only one more cut this year – and perhaps not before year-end,' Van Zyl said.
Uncertainty surrounding the proposed 30% tariffs on South African exports to the US is another factor weighing on the economy, he added, as these could impact export-driven industries such as manufacturing, mining and agriculture.
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''This uncertainty, combined with rising inflation, puts policymakers in a difficult position – trying to support growth while also protecting the rand and price stability'.
Potentially lower inflation targets later in the year or in 2026 could also jeopardise the interest rate situation for South Africans going forward.
South African Reserve Bank (SARB) governor Lesetja Kganyago has strongly advocated for the country to lower its inflation target from 4.5% to 3%.
Experts argue that a lower inflation target would improve price stability, reduce borrowing costs and enhance investor confidence in the long term. However, many feel it would entail some short term 'pain' for the sake of long-term gain.
Yet tightening monetary policy could be a dangerous move in the current economic climate, warns Frederick Mitchell, chief economist at Aluma Capital.
'Conventional wisdom suggests that raising interest rates can curb inflation, yet in the current environment, where inflation remains subdued but economic growth is threatened, tightening monetary policy may exact an economic toll without addressing the underlying trade issues,' Mitchell explained.
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