The South African Reserve Bank (SARB) is expected to cut interest rates in September—but the cut could be far bigger than previously expected.

Although the SARB’s Monetary Policy Committee (MPC) voted to keep the repo rate on hold at a 15-year high of 8.25% in its July meeting, two of the six members voted to cut interest rates by 25 basis points.

The SARB has raised interest rates by a significant 475 basis points since 2021, a move aimed at curbing inflationary pressures in the economy.

The outlook for interest rate cuts has become more positive lately. Inflation is expected to return to the SARB’s target midpoint of 4.5% in Q4 2024 – a vast improvement from its May forecast, which only saw a return in Q2 2024.

The rand has also strengthened following the formation of the Government of National Unity (GNU) between the ANC, DA, IFP, PA, FF Plus, UDM, Rise Mzansi, Al Jama-Ah, UDM, and PAC.

The US Federal Reserve is also expected to start cutting its interest rates in September after disappointing job numbers sparked fears of a recession. This should give the South African central bank further scope to cut rates without impacting the rand.

Amid this, several financial institutions and analysts, including Bank of America, Standard Bank, Nedbank, and the Bureau for Economic Research (BER), expect interest rates to be cut by 25 basis points in September.

Although the BER forecasts a 25-basis-point cut, it does see the possibility of the SARB cutting rates by 50 basis points in September.

“For this to materialise, the rand exchange rate would need to behave—with higher probabilities of faster Fed easing possibly helping in this regard—and the oil price should not spike up on a sustained basis,” said the BER.

“Market developments, global monetary policy dynamics, particularly decisions by the Fed, which meets the day before the SARB, and the actual inflation prints for July and August—the day before the September SARB meeting—will help shape this view.”

Services inflation trends will also be significant, with the BER’s inflation expectations coming out on 12 September, a week before the MPC meets.

“If expectations are sticky, a bigger cut is unlikely, but we do know the SARB targets 4.5%, and inflation is heading there—and, for now, likely to stay there—so some easing from the current restrictive stance is warranted.”

Not enough

However, Governor Lesetja Kganyago warned that lowering interest rates will only partially achieve economic growth and address South Africa’s widespread inequality.

“There is only so much that can be achieved with monetary policy,” Kganyago told an audience at the University of Free State in Bloemfontein.

“Changing interest rates is certainly easier than improving education, managing urbanisation or ending load shedding,” he said.

“What really matters for inequality is economic growth, job creation and productivity growth. Keeping inflation low and stable supports growth in the medium to long run.”

Although Kganyago says that interest rate cuts would provide a limited short-term boost to the economy, they would also provide short-term relief to many households.

Capitec told BusinessTech that it was highly concerned about the higher levels of bad debt seen in 2024.

“Despite some moderation in inflation, it remains persistently high, impacting repayment rates,” Capitec said.

“The financial strain is primarily driven by high inflation and base interest rates that have reduced disposable income and affordability for many South Africans.”

Many banks, including Capitec and Standard Bank, have reduced their credit extension to their retail clientele amid higher credit impairments.