Loaded for Bear: Stars are aligned for a rate cut on Thursday, and why not make it 50 basis points?

Daily Maverick

2 days ago

The Monetary Policy Committee will almost certainly not cut the repo rate by 50 basis points. But its success in containing inflation gives it room to roam on this front.
The case for the South African Reserve Bank (SARB) to cut interest rates on Thursday, 29 May 2025, is strong, and the economic stars have aligned in all of the right places for such an outcome.
The market consensus is that the SARB's Monetary Policy Committee (MPC) will cut its key repo rate by 25 basis points to 7.25% — which would bring the prime lending rate to 10.75% — when it wraps up its bi-monthly meeting on Thursday.
A Reuters poll found that 15 of the 25 economists surveyed expect such a move, while nine forecast a hold.
One of the economists went against the grain, predicting a 50-basis-point cut. And while this maverick take is an outlier and the cautious SARB will almost certainly not lower rates on that scale, it actually has space to be bold on this front.
Let's start with consumer inflation. The SARB's mandated target range is a wide range of 3% to 6% for the consumer price index (CPI). In March and April, CPI came in below this target, at 2.7% and 2.8% respectively.
The Reuters poll cited above sees South Africa's CPI averaging 3.5% this year and then accelerating to 4.2% in 2026 and 4.4% in 2027. These expected averages are below the midpoint of the target range, which in reality is what the SARB — which has strongly signalled it would like to change the bullseye to 3.0% — is aiming for.
One of the tasks of the MPC is to 'anchor' inflation expectations, and it seems to have done that given the consensus outlook among economists.
In its latest statement in March, the MPC's projections were for CPI to average 3.6% this year and 4.5% in 2026.
One factor that informed that forecast was the proposed VAT hike, and that is now dead and buried. But the inflation-linked increase in the fuel levy will accordingly adjust the outlook for fuel prices this year.
Forward-looking
The MPC, it must be stressed, is forward-looking and it crafts monetary policy with a telescope that scans the economic horizon. Whatever decision it reaches on Thursday will be based on the effects it expects six or 12 or 18 months down the road.
And that outlook in terms of inflation is currently benign.
Another key factor that is closely linked to inflation is the value of the rand, especially its exchange rate with the US dollar, which affects the costs of key imports such as oil. The SARB's main mandate 'is to protect the value of the currency in the interest of balanced and sustainable economic growth'.
When the last MPC decision was made on 20 March, the rand was fetching 18.14/dlr. It then tanked and flirted with record lows close to 20/dlr but has since rebounded to below 18/dlr.
One reason behind this state of affairs has been dollar weakness on the global currency stage in the face of US President Donald Trump's ham-fisted and ill-conceived tariff policies and trade wars.
The chaos rippling out of the White House has upended markets and triggered downgrades for global economic growth. The shroud of uncertainty thrown up as a result gave the MPC pause in March when it held rates steady.
But one silver lining has been unexpected support for the rand, and despite the expected inflationary surge in the US from Trump's tariff tiffs, the Federal Reserve is still expected to cut rates modestly later this year.
Having said that, no cut is seen when its Federal Open Market Committee next meets in June, and that prospect alone could contain Thursday's MPC move to 25 basis points or even another hold. Maintaining a high rate differential with the US props the rand up against the dollar because of the higher returns on offer.
A case can still be made for the MPC to throw its usual caution to the wind and make a 50-basis point cut.
The main exhibits on display here are South Africa's simply woeful rates of economic growth and shocking levels of unemployment — as well as the SARB's own success in bringing inflation to heel.
In Budget 3.0, the Treasury slashed its forecast for South African economic growth in 2025 to 1.4% from 1.9% in March, and typically that looks optimistic. Returning to the Reuters poll cited above, the economists surveyed see growth of only 1.2% this year.
And the dreadful duo of sluggish economic growth and a sky-high unemployment rate of 31.9% in Q1 of this year — a 1 percentage point increase from the previous quarter — is stifling demand pressures in the economy, which in turn is a big brake on inflation.
Slowdown
South African retail trade sales on a year-on-year basis rose only 1.5% in March, a significant slowdown from 4.1% in February and 7.0% in January when there seems to have been a spending splurge sparked by the initial early pension draw-downs under the Two-Pot reforms.
And in the three months to the end of March compared to the previous quarter, retail sales growth was just 0.1%. Meanwhile, mining and manufacturing output both declined in Q1 compared to the last quarter of 2024, raising the prospect of a possible Q1 economic contraction to start the year.
One thing about a bigger-than-expected rate cut now is that it could help lift growth down the road without inflation quickening beyond the SARB's target range.
I don't really expect the bank to make such a big cut, and the current rate and trajectory of inflation vindicate its approach to monetary policy — this MPC with the level-headed Lesetja Kganyago at its helm is first class.
But that vindication also means that the MPC now has more room to roam.
Given the outlook for inflation and South Africa's dire pace of economic growth, I would say that there is scope for a 50-basis point cut to provide further relief to consumers and lower the cost of borrowing for businesses big and small. And this can be done without reigniting the flames of inflation, which the SARB to its credit has been dousing. DM