SARB declares preference for lower inflation target as it announces 25 bps rate cut

The Money Show's Stephen Grootes gets comment from Alexforbes chief economist Mpho Molopyane and Azar Jammine, director and chief economist at Econometrix.

While analysts largely expected an interest rate cut announcement on Thursday, the SA Reserve Bank saying definitively that it now prefers a lower inflation target came as a surprise.

This would make 3% the objective, as opposed to the 4.5% which is the current midpoint of the 3-6% target band.

Delivering the Monetary Policy Committee statement, Governor Lesetja Kganyago said the benchmark repo rate would drop by 25 basis points to 7%.

This means the prime lending rate now sits lower at 10.5%.

The decision by the MPC was unanimous.

Kganyago noted that the June CPI print showed headline inflation at 3% and core inflation at 2.9%, still at the bottom of the target range. 

They expect headline inflation to average 3.3% in 2025.

The rate decision could almost be seen as secondary, given the unilateral announcement on a lower inflation target, comments Alexforbes' Mpho Molopyane.

She notes that it comes as South Africa waits for a final announcement on a looming tariff increase from the US administration.

"Whether we're going to get a lower rate or boomerang back to 30%, who knows at this stage."

Mpho Molopyane, Chief Economist - Alexforbes

"For me it was quite interesting that, going into this meeting we had the fundamentals pretty much supportive of a rate cut, but at the previous main meeting the scenarios that were sketched included one where they worried that higher tariffs would lead to currency weakness and it could be inflationary, and in that case we'd see the repo rate going higher."

Mpho Molopyane, Chief Economist - Alexforbes

Econometrix's Azar Jammine also highlights the way the SARB went about raising its preference for a lower inflation target.

He describes it as 'an ingenious ploy' on the part of the central bank.

"They've kept saying that they're working towards reducing the inflation target because that will influence inflation expectations downwards, but one has kept thinking in terms of the fact that it is finally, at the end of the day, a National Treasury decision."

Azar Jammine, Chief Economist - Econometrix

"In a sense, the SARB have almost overridden Treasury, saying 'you don't have to decide now whether to go for the 3%' but WE are certainly going to target that and as a consequence they now have a far lower inflation forecast and then have enhanced the ability to reduce interest rates by 1% more than previously anticipated."

Azar Jammine, Chief Economist - Econometrix

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