The South African Reserve Bank (SARB) announced a 25-basis point cut in the policy rate on Thursday, September 20, bringing rate down to 8 per cent per annum. The SARB's monetary policy committee (MPC) carefully considered various factors before making this decision, including the inflation outlook, economic growth prospects, and the exchange rate. Ultimately, it concluded that a less restrictive monetary policy stance would support sustainably lower inflation over the medium term. The central bank's forecast indicates that interest rates will gradually move towards a neutral level next year, stabilising slightly above 7 per cent. However, the MPC emphasised that these projections are subject to change based on economic developments and data. While inflation has been on a downward trend, there are still risks that could push it higher than expected. Factors such as rising housing costs, larger electricity price increases, or wage growth outpacing productivity could contribute to higher inflation. On the economic growth front, South Africa's output has been slightly below expectations in the first half of the year. However, the central bank anticipates improvements in the second half, driven by increased confidence and a more stable electricity supply. Looking ahead, the central bank has revised its medium-term growth projections upward. This is based on the expectation of improved performance in network industries, particularly electricity, and continued reform efforts. Despite this, the pace of growth is expected to remain below long-run averages. One area of concern is investment, which has been declining for several quarters. The central bank believes that a stronger investment performance is essential for sustained higher growth. While they anticipate an investment recovery, the scale and speed of this recovery will be crucial for South Africa's long-term economic prospects. Regarding inflation, the headline rate has eased to a three-year low of 4.4 per cent in August. The central bank forecasts that this downward trend will continue, with inflation remaining below the midpoint of their target range through 2026. "Our forecast suggests this progress will be sustained, with inflation contained below the 4.5% midpoint of our range through to the end of the forecast horizon, in 2026." "For core inflation, we expect the trajectory to be slightly below 4.5% over the medium term. Again, this is primarily due to the exchange rate, which affects core mainly through import prices." In the near term, a stronger exchange rate and lower oil prices are expected to further contribute to lower headline inflation. However, the central bank emphasises that it will focus on the medium-term outlook and look through short-term supply shocks. Overall, the central bank's decision to cut interest rates reflects its commitment to supporting economic growth and maintaining price stability in South Africa. While there are risks to the outlook, the central bank remains optimistic about the country's economic prospects. Attribution: SARB
