Why Kganyago can – and must – cut rates

While markets expect the South African Reserve Bank (SARB) to cut interest rates this week, governor Lesetja Kganyago and the monetary policy committee (MPC) are known for their caution. But now is precisely the time to fight those instincts and be bold.

Low inflation, weak growth and a budget that is set to squeeze consumers all point to room for cutting interest rates. The case is reinforced by signs that the US economy is slowing and inflation there remains stubborn – in contrast to South Africa.

As it is, most analysts believe the SARB will cut interest rates on Thursday. Twenty-one economists polled by Bloomberg expect a 25 basis point (bp) cut to 7.25%. That would reduce the prime lending rate – used to price loans for consumers – to 10.75%.

Yet Kganyago and the six-member MPC have other concerns that may weigh more heavily when they meet on Thursday. One is their mission to shift South Africa towards a lower inflation target, to entrench a culture of price stability.

“The immediate aim of restrictive policy would be to guide inflation expectations even lower and embed inflation that is currently at the bottom of the inflation target range,” Nedbank’s Nicky Weimar and Johannes Khosa wrote in a recent note. “With the switch to a lower inflation target looming, the MPC will likely wait for more clarity.”

In other words, don’t bet the house on an interest rate cut.

Officially, the bank wants inflation at between 3% and 6%. But if the Bank’s inflation target were narrowed to, say, 3%-4%, wage negotiations with civil servants could start from a lower base. For years, the SARB has signalled that the 4.5% midpoint is its true anchor.

Deputy governor Fundi Tshazibana recently told Bloomberg that technical teams are ready to make recommendations to the National Treasury about reducing the inflation target. Deputy finance minister David Masondo said as much too.

The reality is, if the SARB were focused solely on the fundamentals, a rate cut would be hard to argue against.

For one thing, inflation remains low. While it rose slightly to 2.8% in April from 2.7% in March, Nedbank expects it to average 3.5% this year, which is down from 4.4% in 2024. For next year, it expects inflation to remain steady at about 4.5%.

Second, consumer spending has slowed sharply too, and with the real interest rate – the gap between the repo rate and inflation – at nearly five percentage points, monetary policy is “quite restrictive”, according to Nedbank.

This gives the SARB room to cut rates by at least 50bp over the course of this cycle. And once the Fed starts easing – as is expected later this year – the interest rate gap between South Africa and the US will narrow, reducing the risk of capital flight.

Breaking from the Fed

Albert Botha, head of fixed income at Ashburton Investments, believes this week’s meeting offers a chance for Kganyago to “signal a clear departure from the trajectory” of US interest rates.

US inflation expectations for October have risen 1.2 percentage points to 3.7% year on year over the past six months, while South Africa’s have fallen by 50bp to 4.5%.

“To put it differently, US inflation saw a disastrous spike, ground its way lower, is still not at the target and is expected to get worse,” Botha says. “In South Africa, we saw higher inflation and brought it under control. That was followed by a series of positive surprises alongside benign forward expectations.”

With that sort of divergence, the SARB can afford to break from the Fed. Its credibility – built over years of disciplined policy – gives it room to act independently.

“A rate cut in South Africa is now more than justified,” Botha adds, “and the lack of a cut may be somewhat questionable.”

Still, the MPC remains wary of external shocks and US trade uncertainty, which could spook markets or weaken the rand.

“It is unlikely to be a unanimous decision,” says Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research. “While a strong case can be made for further easing, we believe the SARB may again err on the side of caution and keep its rate unchanged.”

In March, the Bank held rates steady after three consecutive cuts of 25bp in September, November and January. At the time, it cited an uncertain global backdrop because of US President Donald Trump’s threats over tariffs, and a spat at the time over South Africa’s budget.

“When thinking about SARB decisions in recent months,” De Schepper adds, “we’ve started to talk about what the SARB is likely to do – and that’s not always the same as what the SARB could, or even should, do.”

The question is: will Kganyago be brave? Or stick to a script that is looking increasingly inflexible?

_{Top image: Reserve Bank governor Lesetja Kganyago. Picture: Horacio Villalobos#Corbis/Corbis via Getty Images.}