The Monetary Policy committee will meet this week before the South African Reserve Bank (Sarb)announces its decision about the repo rate on Thursday afternoon. Debt-ridden and broke consumers are especially interested in what the decision will be to see if they will have a few more rands in their pockets afterwards. Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano and Ame Muller, economists at FNB, point out that the Monetary Policy Committee (MPC) already lowered the repo rate from 8.25% at the start of 2024 to 6.75% by the end of 2025.
However, they say, even with this, policy remains restrictive by their estimate of the rate that is neutral on the economy and considering expected inflation. “The question is, how restrictive does the MPC plan on keeping policy to influence pricing behaviour sufficiently and ensure that medium-term inflation is anchored at 3%? “We may not have an answer to this question yet, but there are multiple factors that could shift the MPC in different directions.
Therefore, to the question of whether the MPC will cut interest rates again at their upcoming meeting on 29 January, the answer is yes, no and maybe.” The MPC delivered 25 basis point cuts in July, when it unilaterally shifted to the lower target and again in November, despite fears that a lower target would cause the committee to be more conservative as they worked to guide expectations lower. “Instead, not only did the MPC appear willing to look through temporary increases in inflation, but they likely also believed that expectations would be more dynamic, especially in an environment of slow inflation. “Based on the Bureau of Economic Research (BER) survey covering analysts, trade unions and business for the fourth quarter, both two-year-ahead and five-year-ahead inflation expectations shifted from 4.2% to 3.7% – with only business still around 4%.” The economists say with soft core goods inflation and fuel deflation, headline inflation should ease further this year and would support a continued compression in expectations.
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This could be enough for another cut. “While the speed of adjustment in expectations in the fourth quarter is encouraging, we did see a similar move in the first quarter of 2018 after the MPC announced its preference for 4.5%, but adjustments slowed thereafter,” the FNB economists say. “Therefore, this could be a knee-jerk reaction and the MPC could decide to spend time assessing the response of government budgeting processes alongside continued moral suasion towards price setters before easing policy again.”
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