Interest rate s marginally, but signals better times ahead

By Lindi Botha | 19 September 2024 | 5:40 pm

The South African Reserve Bank (SARB) has lowered the policy rate by 25 basis points to 8% per annum. This will take effect from 20 September, bringing relief to debt-laden consumers and farmers.

With interest rates entering a cutting cycle, a stronger rand is on the cards, which will make imported machinery more attractive. Photo: Lindi Botha

On Thursday during a live media briefing, SARB governor Lesetja Kganyago said the decision to reduce the rate was unanimous among the monetary policy committee. The decision was based on the fact that headline inflation eased to 4,4% in August, a three-year low, and close to the middle of SARB’s target range.

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Our forecast suggests this progress will be sustained, with inflation contained below the 4,5% midpoint of our range through to the end of the forecast horizon in 2026,” he said.

The reduction errs on the conservative side, disappointing many who expected a 50 basis point reduction to follow that of the US announced earlier this week.

Waldo Krugell, economics professor at the North-West University, said government has done a good job in getting inflation under control.

“Keeping the rate unchanged would have been safe, but would discourage economic growth. Although any reduction is risky, it is needed to stimulate the economy, and so a 50 basis point reduction is welcome. Consumer confidence is already improving and this is the boost the economy needed to get back on track,” Krugell said.

Marlene Louw, senior agricultural economist at Absa, said that although the overall effect of the lower interest rates would be small, any relief was welcome for an agriculture sector that had faced a difficult year.

The greater benefit of the cut is that it has a compounding effect on the economy.

“The momentum d by a reduction in the rate is important. The cut will support the rand, which will bring relief to consumers and farmers. While summer exports might achieve lower prices with a stronger rand, it still brings down the cost of inputs, most of which are imported,” Louw said.

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Regarding the prospects for the rand, Louw said the last quarter of 2024 and the first quarter of 2025 was likely to see a stronger rand. This was since the 50 basis point reduction in the US inflation rate meant that investments in emerging markets like South Africa now looked more favourable.

With a stronger rand on the cards and a lower oil price, fuel prices are likely to subside, bringing further relief to the agriculture sector.

Louw noted that the positive sentiment d by rate cuts boosted consumer confidence, leading to higher spending.

With a cutting cycle on the cards, she said that South Africa could look forward to more reductions.