Analysts concur: Sarb to cut rates by 25bps on Thursday
Another 25-basis-points interest rate cut is the consensus among economists and fund managers ahead of the South African Reserve Bank (Sarb) Monetary Policy Meeting on Thursday.
South Africa’s central bank delivered its first rate cut in four years in September last year; a modest cut of 25 basis points. The second cut in the cycle was in November – another 25 basis points.
Lara Dalmeyer, portfolio manager at Abax Investments, notes that there are “divergent expectations” from the market. “A case can be made for a 50-basis-points cut – or for nothing. In our view, it will probably be 25 basis points.
“If you look purely at local [conditions], they [the Reserve Bank] can cut, and they should. Inflation is low and the economy could do with a stimulus.”
Murray Winckler, portfolio manager at Laurium Capital, is of the view that the central bank will cut rates twice in 2025, by 50 basis points in total.
“We have inflation running at 3% and it will probably remain low for the first half of the year. Fuel prices will probably not go up much, but it of course depends on the rand not weakening significantly from here.”
The ‘big unknown’
The rand traded at around R18.73 against the dollar on Monday. The local currency has been trading in a range of between R18.30 and R18.76 for the past two weeks. It has depreciated almost 7% against the dollar since Donald Trump won the US election on 5 November.
Nicky Weimar, group chief economist at Nedbank, notes that the rand [against the dollar] is “the big unknown” at present.
“The dollar will set the tone for the rand. The Reserve Bank will be painfully aware of that. And if Donald Trump’s policies result in inflation and higher US interest rates, or fewer [rate] cuts or no further cuts, the Reserve Bank will become very cautious.”
Sarb Governor Lesetja Kganyago cautioned recently at the World Economic Forum in Davos that US protectionist policies, such as tariffs, are potentially inflationary and risk halting future interest rate cuts.
“To the extent that the measures taken are inflationary, it could slow down the disinflation process that the central banks had so steadfastly worked on since the great inflation of 2022,” Kganyago said in an interview with Bloomberg TV.
‘Punishingly’ high real rates
Weimar points out that the Sarb still has enough room to cut interest rates by 25 basis points on Thursday.
“Here’s the thing: the [US] Fed has already cut [rates] by 100 basis points. We’ve only cut by 50 basis points. So, the Reserve Bank may cut by 50 basis points without putting undue pressure on the rand. And we believe that they’ll do that.”
According to Weimar, real interest rates are currently “punishingly” high. Besides the expected 25-basis-point cut on Thursday, she believes another 25 basis points cut is on the cards in March.
“And after that? Nada.”
She cautions that consumers should ready themselves for an environment of sticky inflation and higher interest rates.
“And in South Africa, monetary policy is getting tighter. The Reserve Bank has started to cut interest rates [in September]. But because inflation is falling faster than interest rates, real interest rates have been rising.
“What that means for the poor consumer is that debt service costs are still punishing – it consumes almost 10% of their income and that is just the interest portion of their debt – not the capital repayment, not the banking fees.”
Weimar believes that the most recent inflation figure of 3% is “probably the lowest point”.
“From here on it’s going to start drifting upwards off that lower base.”
Upside risks
Lisette IJsell de Schepper, chief economist at the Bureau for Economic Research, notes that although inflation continues to undershoot expectations, persistent upside risks and uncertainty could mean the central bank will be hesitant to cut interest rates further.
“That said, amid improving inflation expectations and a still relatively benign inflation outlook, we believe there is scope to cut by a further 25 basis points.”
A further 25-basis-points cut after January is possible, she says, but like Weimar she believes a third cut is unlikely due to the Sarb’s emphasis on the upside risks to inflation.
Annabel Bishop, Investec chief economist, believes besides a likely cut on Thursday, there will not be a further cut in March.
“The interest rate cut cycle is expected to slow this year ... with Sarb not expected to ease interest rates again until July at least,” she notes.
-MONEYWEB
South Africa’s central bank delivered its first rate cut in four years in September last year; a modest cut of 25 basis points. The second cut in the cycle was in November – another 25 basis points.
Lara Dalmeyer, portfolio manager at Abax Investments, notes that there are “divergent expectations” from the market. “A case can be made for a 50-basis-points cut – or for nothing. In our view, it will probably be 25 basis points.
“If you look purely at local [conditions], they [the Reserve Bank] can cut, and they should. Inflation is low and the economy could do with a stimulus.”
Murray Winckler, portfolio manager at Laurium Capital, is of the view that the central bank will cut rates twice in 2025, by 50 basis points in total.
“We have inflation running at 3% and it will probably remain low for the first half of the year. Fuel prices will probably not go up much, but it of course depends on the rand not weakening significantly from here.”
The ‘big unknown’
The rand traded at around R18.73 against the dollar on Monday. The local currency has been trading in a range of between R18.30 and R18.76 for the past two weeks. It has depreciated almost 7% against the dollar since Donald Trump won the US election on 5 November.
Nicky Weimar, group chief economist at Nedbank, notes that the rand [against the dollar] is “the big unknown” at present.
“The dollar will set the tone for the rand. The Reserve Bank will be painfully aware of that. And if Donald Trump’s policies result in inflation and higher US interest rates, or fewer [rate] cuts or no further cuts, the Reserve Bank will become very cautious.”
Sarb Governor Lesetja Kganyago cautioned recently at the World Economic Forum in Davos that US protectionist policies, such as tariffs, are potentially inflationary and risk halting future interest rate cuts.
“To the extent that the measures taken are inflationary, it could slow down the disinflation process that the central banks had so steadfastly worked on since the great inflation of 2022,” Kganyago said in an interview with Bloomberg TV.
‘Punishingly’ high real rates
Weimar points out that the Sarb still has enough room to cut interest rates by 25 basis points on Thursday.
“Here’s the thing: the [US] Fed has already cut [rates] by 100 basis points. We’ve only cut by 50 basis points. So, the Reserve Bank may cut by 50 basis points without putting undue pressure on the rand. And we believe that they’ll do that.”
According to Weimar, real interest rates are currently “punishingly” high. Besides the expected 25-basis-point cut on Thursday, she believes another 25 basis points cut is on the cards in March.
“And after that? Nada.”
She cautions that consumers should ready themselves for an environment of sticky inflation and higher interest rates.
“And in South Africa, monetary policy is getting tighter. The Reserve Bank has started to cut interest rates [in September]. But because inflation is falling faster than interest rates, real interest rates have been rising.
“What that means for the poor consumer is that debt service costs are still punishing – it consumes almost 10% of their income and that is just the interest portion of their debt – not the capital repayment, not the banking fees.”
Weimar believes that the most recent inflation figure of 3% is “probably the lowest point”.
“From here on it’s going to start drifting upwards off that lower base.”
Upside risks
Lisette IJsell de Schepper, chief economist at the Bureau for Economic Research, notes that although inflation continues to undershoot expectations, persistent upside risks and uncertainty could mean the central bank will be hesitant to cut interest rates further.
“That said, amid improving inflation expectations and a still relatively benign inflation outlook, we believe there is scope to cut by a further 25 basis points.”
A further 25-basis-points cut after January is possible, she says, but like Weimar she believes a third cut is unlikely due to the Sarb’s emphasis on the upside risks to inflation.
Annabel Bishop, Investec chief economist, believes besides a likely cut on Thursday, there will not be a further cut in March.
“The interest rate cut cycle is expected to slow this year ... with Sarb not expected to ease interest rates again until July at least,” she notes.
-MONEYWEB
