Interest rate Cut at 0,25%
The South African Reserve Bank reduced its Key Interest rate by 25 points to 7,75% Today (21 Nov) in what was rather a surprising decision, after the Consumer Price Index Inflation for October had dropped to 2,8%, the lowest inflation in four years.
The stated policy of the reserve bank had been to maintain higher lending rates to force lower inflation numbers, and with three consecutive months seeing consumer inflation figures drop to below all forecasts, it was anticipated that interest rates should follow.
Mid-Term Risks High – Reserve Bank Governor
The Reserve Bank Governor, Lesetja Kganyago said in a statement that while inflation remains well-contained in the near-term, he cautioned that the medium-term outlook remains uncertain, with significant upside risks.
These he said were the potential for electricity and water supply price increases as well as food and service price increases in the mid-Term.
The State-owned energy producer Eskom has requested a 35% increase in energy rates for 2025 from the energy regulator NERSA and this is likely the biggest threat to price inflation.
State Not Consumers Driving Inflation
This is however a function of State control, and not an inflation driven by consumer demand but by structural state increases due to poorly functioning State Owned Enterprises that are drowning in Debt due to poor management, while State departments are themselves the main culprits of not paying for their facilities.
The main driver of inflation in the past 12-18 months in South African has been the fuel prices and energy price increases in the Southern African State.
While government has announced widespread salary increases for 2025, most consumers in the country are battling with high debt levels and fuel and food prices, that are only beginning to see some price reduction pressure.
The hope that a more aggressive approach to interest rate cuts would be adopted due to a much lower than anticipated interest rate, has been crushed with many people reacting with ager on social media after the announcement.
Inflation Targeting as basis for Interest Rates a Myth
It would seem apparent that the Reserve Bank has abandoned its Inflation targeting focus on which to base the lending rate and it remains to be seen what the impact on the economy will be. The hoped stimulus that a lower interest rate would have had is now questionable and it begs the question: how low would the inflation rate need to fall to prompt a further rate cut?
Has the Reserve Bank by its Conservative and rather questionable approach now placed a further hurdle in the way of economic growth in a country that is already barely showing any progress in GDP growth this year?
