Why the South African Reserve Bank should cut interest rates now

18 July 2024 Old Mutual

In light of the mounting financial pressures on South African consumers, there is an urgent need for the immediate interest rate cut by the South African Reserve Bank (SARB).

Since November 2021, the monetary policy committee (MPC) has implemented eleven interest rate hikes, totalling 475 basis points, resulting in a 14-year high repo rate of 8.25%.

As we now eagerly anticipate the next MPC interest rate announcement on Thursday, July 18, according to Old Mutual Group Chief Economist, Johann Els, “A timely reduction in rates will provide much-needed relief and stimulate economic growth.”

Els asserts that the SARB should not wait for the US Federal Reserve to act first. He notes that South African inflation, excluding petrol and electricity, has been easing rapidly, with consumer goods inflation currently at 3.5%. Additionally, recent surveys from the Bureau of Economic Research at Stellenbosch University show a significant decrease in inflation expectations, with labour unions’ expectations dropping to 5% from 5.6% in the previous quarter.

“Consumers are clearly under pressure,” Says Els. “We don’t have to wait for inflation to hit the Reserve Bank’s implicit target of 4.5% before taking action. The indicators are moving in the right direction, and we have a window of opportunity to provide relief to the economy.”

He also highlighted the reduced political risk following the establishment of a government of national unity, which has contributed to a stronger and more stable rand exchange rate. According to Els, this stability provides an ideal backdrop for the SARB to implement rate cuts without fearing destabilisation of the currency.

But he warns that delaying rate cuts until September or even November, as some analysts suggest, would be a policy error. “We don’t have to wait for the Fed to make a move. Our own economic conditions justify a rate cut now,” he stated.

The call for an immediate rate cut comes as South African consumers face increasing financial strain. By reducing interest rates, the SARB can help lower borrowing costs, stimulate spending, and provide a boost to the local economy. Els believes that this proactive approach will not only alleviate consumer stress but also foster a more favourable environment for economic growth.

An immediate rate cut by SARB this week would offer a welcome reprieve for the local economy,” Els concluded. “It’s about taking action now to support South Africans and drive positive economic momentum.”

fanews magazine