The South African Reserve Bank Governor (SARB), Lesetja Kganyago says the country has to sustain a low inflation for a period of time in order for the bank to justify further interest rate cuts.
The Governor’s comment comes as South Africans wait with bated breathe for the Monetary Policy Committee’s (MPC) interest rate decision in about two weeks time, on September 19, 2024.
The repo rate is currently at a 14-year high of 8.25% and the prime lending rate is at 11.75%.
Kganyago told SAfm radio on Monday night that South Africa needs is not just lower inflation, but sustained low inflation.
The Governor acknowledged that there has been a decline in the inflation rate in July 2023.
The Consumer Price Index (CPI) noted in August that headline inflation eased to 4.6% year-on-year, down from 5.1% in June.
This drop marks the lowest inflation rate in three years, matching the annual 4.6% rate recorded in July 2021.
The Reserve Bank hopes to stabilise inflation and anchor price-growth expectations at the midpoint of its 3%-6% target range.
Kganyago said the decline in the inflation rate in July and said he understood the optimism for an interest rate cut, but he still advised South Africans to be cautious.
“It was this time last year that we had an inflation reading that was at 4.7%, and there was excitement around it,” he noted.
“Lower inflation is always welcome, but what was needed to be seen was sustained low inflation, and indeed, the South African Reserve Bank was proved to have been correct because a few months later, inflation crept up,” Kganyago explained.
The MPC will only be comfortable to lower the interest rate when inflation eases sustainably toward 4.5%, he added.
A call for Reserve bank to reduce interest rates
The Public Servants Association (PSA) in late August called for the Reserve Bank to cut interest rates following the drop in inflation.
The PSA, which represents more than 245,000 public servants, said the reduction in the annual CPI and said that this decrease would offer relief to consumers, as it is expected to lower transport and food costs.
Over recent years, high borrowing costs and living expenses have placed considerable strain on households. The PSA said that despite the positive shift in inflation, the interest rate currently stands at its highest level.
The PSA urged the MPC to consider reducing the interest rate by at least 25 basis points during its September meeting.
“Such a decision would alleviate financial pressures on households and bolster consumer confidence,” the association said.
IOL BUSINESS