The recent decision by the South African Reserve Bank to reduce the interest rate by 25 basis points to 8% comes after a significant drop in the country’s headline inflation, hitting its lowest levels in three years. This marks the first rate cut since 2020.
Since May 2023, the bank had maintained the rate at 8.25% until this recent adjustment.
Lesetja Kganyago, the governor of the South African Reserve Bank, stated, “This decision aligns with forecasts of diminishing inflationary pressures in the medium term.”
South Africa witnessed a decrease in inflation to 4.4% in August, down from 4.6% in July, driven by lower transport prices and utility rates. This figure represents the lowest inflation rate since April 2021.
The rate cut is intended to inject more liquidity into Africa’s most industrialized economy, boosting growth momentum amidst positive sentiments towards the country’s government of national unity (GNU) and improved electricity supply. Despite these improvements, South Africa’s economy only grew by 0.4% in H2 2024, highlighting the importance of stimulating growth through a lending rate reduction.
Most economists had anticipated this rate cut ahead of the central bank’s announcement, with projections suggesting further reductions in the lending rate over the next three quarters, potentially reaching 7.25% by May 2025.
The ongoing slowdown in inflation has been a key factor influencing the bank’s decision to continue cutting rates in the future. Projections indicate inflation is expected to average 4.7% in 2024, declining to 4.3% in 2025.
In July 2024, the central bank indicated that South Africa’s economy was around 100 basis points away from its perceived ‘neutral’ state, leading to a strategy of gradual rate reductions instead of significant cuts.
While some economists argue for more substantial rate cuts, suggesting reductions of up to 50 basis points, the South African Reserve Bank’s Monetary Policy Committee is expected to announce its next rate decision on 21 November 2024.
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