Reserve Bank cuts rates but warns predicted risks have materialised

Reserve Bank governor Lesetja Kganyago said on Thursday the monetary policy committee had agreed to cut the repo rate by 25 basis points to maintain price stability as inflation remains within the lower point of the target band.

However, he warned that the risks that were warned about in the November MPC meeting have since materialised, including an economic outlook fraught with tariffs and protectionist trade policies with President Donald Trump returning to the White House.

Briefing reporters on the repo rate announcement in Pretoria on Thursday afternoon, Kganyago said the space for rate cuts by the US Federal Reserve now looks limited, with core inflation still elevated and new inflation risks emerging, such as rising tariffs on trade.

“It is even possible that US rates could go up again to stabilise inflation. Growth outside the US is generally more subdued. The largest economies in Europe have had weak economic performance. Germany has had two years of contraction and both France and the UK have had slow growth.”

He said four MPC members favoured a rate cut while two favoured keeping rates on hold. Locally, he said, third-quarter contraction of GDP in South Africa due to agricultural production declines had limited implications for how the underlying growth trend is to be understood.

“For the fourth quarter, we anticipate a rebound. This will be supported by more normal agricultural production as well as strong household spending, given tailwinds including lower inflation and two-pot pension withdrawals.”

He said the MPC expected these tailwinds would close the output gap. The MPC expected South Africa’s potential growth to trend higher over the next few years, getting to about 2% by 2027.

“Looking at the composition of output since the onset of Covid-19, mining and manufacturing have underperformed with output still below pre-pandemic levels. It is only due to growth in the tertiary sector that the economy is bigger now than it was five years ago.

“As growth picks up, we expect more rebalancing, with a recovery in investment as well as improvements in the primary and secondary sectors. We will be monitoring the data carefully to assess how closely the economy tracks these projections. The risks to the growth forecast are assessed as balanced.”

He said headline inflation averaged 4.5%. Inflation slowed to 3% in December and food inflation had reached 15-year lows. Inflation was likely to remain in the bottom half of the target range, he said.

“Inflation is likely to remain in the bottom half of our target range through the first half of this year. But headline inflation should revert to about 4.5% thereafter, aided by core inflation which remains at or below the midpoint over the forecast period horizon.”

He said risks to the inflation outlook are assessed on the upside.

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