Consistent with expectations, the SARB’s MPC unanimously decided to keep the benchmark repo rate unchanged at 8.25% for a sixth consecutive meeting. The central bank also kept its growth and inflation estimates for this year unchanged, and maintained that risks to their outlooks were broadly balanced.

Analysis

Unsurprisingly, the MPC’s decision to keep the repo rate unchanged at 8.25% for a sixth consecutive meeting was unanimous. Against a backdrop of still-tight global monetary conditions, investors remain judicious over where they invest their capital. South Africa’s risk profile may have improved slightly in recent months, but it remains weak. Accordingly, interest rates need to stay relatively high to compensate investors for exposing their portfolios to the country’s idiosyncratic risk.

That is to say that there is little scope to cut rates at the moment. Not only is headline inflation still above the 4.5% midpoint of the SARB’s target range, but the ZAR also remains too vulnerable to risk cutting rates ahead of major central banks. Doing so would likely trigger an inflation-stoking currency selloff at a time when price pressures are not yet under control.

On the topic of the ZAR, the SARB noted some concern over its recent volatility: “The exchange rate of the rand has been particularly volatile since the previous MPC. It briefly appreciated to a 10-month high against the dollar last week. The starting point for our forecast is R18.57.” It said that the currency market remains “focused on the direction of domestic policy,” alluding to uncertainty around the outcome of this week’s elections. The SARB added that “conditions remain uncertain, but we expect greater clarity in due course.” It was thus reluctant to make any big policy changes until after the election dust has settled, although it was never expected to cut rates before Q4.

Going forward

The SARB is navigating extremely uncertain and fluid economic conditions, and will likely remain highly data-dependent and reactive through the months ahead. However, official forecasts continued to point to policy normalisation, with interest rates expected to ease into more neutral territory by next year. Specifically, the QPM model predicts a repo rate of 7.64% by year-end (down from 7.72% previously), 7.34% by end-2025 (versus 7.37% previously), and 7.33% by end-2026 (unchanged). This implies two rate cuts this year, followed by at least one next year before settling on a rate pause.

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