The South African Reserve Bank has cut the interest rate by 25 basis points to 8% after the country’s headline inflation fell to its lowest levels in three years. It is the first rate cut since 2020.
The bank has kept the rate unchanged at 8.25% since May 2023.
“This decision is consistent with projections of lower inflationary pressures in the medium term,” said Lesetja Kganyago, governor of South African Reserve Bank.
South Africa’s inflation slowed to 4.4% in August, down from July’s figure of 4.6%, after a decrease in transport prices and utility rates. It is the lowest figure since April 2021.
With the rate cut, the Reserve Bank looks to inject more money into Africa’s most industrialised economy and drive growth momentum which has been stoked by positive sentiments towards the country’s government of national unity (GNU) and improved electricity supply. Despite the improvement, South Africa’s economy only grew by 0.4% in H2 2024, making the case for a need to boost growth by cutting the lending rate.
The rate cut has largely been predicted by most economists in anticipation of the apex bank’s announcement. Economists also expect the central bank to cut the lending rate in the next three quarters and project it to reach 7.25% by May 2025.
The inflation slowdown has been cited as the motivating factor for the bank’s decision to continue cuts into the future. Inflation is expected to average 4.7% in 2024 and decline to 4.3% in 2025.
In July 2024, the central bank said South Africa’s economy is about 100 basis points away from what it considers ‘neutral’ and as a result, it will reduce rates gradually instead of making large rate cuts.
Some economists argue that instead of gradual rate cuts, the bank should make significant cuts in the region of 50 basis points. SARB’s MPC is expected to announce its next rate decision on 21 November 2024.
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