South Africa: Lower CPI sparks rate cut hopes

This week, all eyes are on the South African Reserve Bank's Monetary Policy Committee (MPC) meeting, which is set to begin tomorrow and conclude with an interest rate decision on Thursday. It is widely anticipated that the Reserve Bank will kickstart its cutting cycle by reducing interest rates by 25 basis points to 8 percent, with a similar cut expected in November. Annabel Bishop, Chief Economist at Investec, joined CNBC Africa to discuss the factors driving this decision. One of the key aspects that have changed since the last July MPC meeting is the inflation forecast of the South African Reserve Bank. The Bank now expects inflation to hover around 4.5 percent, if not lower, over their forecast period. This marked improvement from previous expectations gives the Reserve Bank the confidence to proceed with interest rate cuts, especially following the anticipated rate cut by the US Federal Reserve. While some economists may argue that inflation expectations are still high, current forecasts paint a more optimistic picture, supporting the case for rate cuts. The stability of the South African Rand has also played a role in the decision-making process. As the US embarks on an interest rate cutting cycle, emerging markets like South Africa benefit from increased positivity in financial markets and a weaker US dollar. Though South Africa's rate cuts are expected to be less aggressive than those in the US, they are still seen as advantageous for the Rand. The conversation surrounding the US Federal Reserve's expected rate cut of 25 or 50 basis points has caused a ripple in markets. While a 25 basis point cut is largely priced in, some market participants anticipate a larger move. However, the gradual approach adopted by central banks globally suggests that a 25 basis point cut is more likely, given the current economic conditions and inflation levels. Amid concerns over potential market instability, central banks closely monitor financial market expectations to calibrate their policy decisions effectively. The long and variable lags associated with interest rate changes apply not only to hiking cycles but also to cutting cycles. The impact of rate cuts may take several quarters to materialize fully. As the South African Reserve Bank navigates its cutting cycle, the effects on the economy will unfold over an extended period. Looking ahead, South Africa is expected to see another 25 basis point cut in November, depending on developments in the US and local inflation rates. With inflation expected to remain below 4.5% in the coming months, the Reserve Bank is likely to continue its rate-cutting trajectory to support economic growth. The final decision will be based on the evolving economic data leading up to the November meeting.