The South African Reserve Bank’s Monetary Policy Committee (MPC) announced a 25-basis-point reduction in the repo rate to 7.75% on Thursday. This follows data released on Wednesday, which showed inflation falling to 2.8% in October, below the bank’s target range of 3% to 6%. As a result, the prime lending rate now stands at 11.25%.
Economist Dawie Roodt noted that the rate cut was widely anticipated, particularly after the positive inflation figures earlier in the week. “A 25-basis-point cut was pretty much in the bag. The only question was whether the Reserve Bank might opt for a larger reduction,” Roodt said.
While Roodt believes there was room for a 50-basis-point cut, he emphasized that Reserve Bank Governor Lesetja Kganyago’s cautious approach prevailed. “Kganyago is a very conservative central banker. He has consistently expressed his desire to see inflation targets reduced further,” Roodt explained.
The MPC’s decision to take a conservative approach is likely influenced by potential risks, including fluctuations in the rand, volatile international oil prices, or unforeseen global crises. “They decided to err on the side of caution. While a 25-basis-point cut won’t significantly impact the economy, every little bit helps,” Roodt added.
Roodt also highlighted the importance of understanding inflation in the broader economic context. “Inflation doesn’t mean that an increase in petrol prices is inflationary. Inflation is the broad-based increase in most prices. In a healthy economy, some prices go up, and others go down—that’s how supply and demand should function,” he said.
He further explained that inflation expectations play a crucial role in shaping inflation itself. “The Reserve Bank has done a lot of research on inflation expectations, which have been gradually declining. A year ago, inflation was much higher. The Reserve Bank’s tight monetary policy is succeeding in mechanically lowering inflation and bringing down inflation expectations,” Roodt remarked.
By maintaining its firm grip on monetary policy, the Reserve Bank is not only addressing current inflation but also influencing future trends. “As long as the Reserve Bank maintains its strict approach, inflation expectations will continue to decrease, ultimately leading to lower actual inflation,” Roodt said.
Looking ahead, Roodt is optimistic that inflation will remain relatively low for an extended period. While the latest rate cut may offer only marginal relief to borrowers, it reflects the Reserve Bank’s ongoing commitment to controlling inflation and ensuring economic stability.
VOC News
Photo: Pixabay
