Sarb faces crucial interest rate decision as CPI data looms

The South African Reserve Bank (Sarb) is poised for a crucial meeting this Thursday as the Monetary Policy Committee (MPC) gears up to deliberate on the country’s interest rate direction.

On Wednesday, Statistics South Africa will release the latest Consumer Price Index (CPI) data which could have a direct impact on the Sarb's decision to cut interest rates or not. 

 The CPI data is expected to offer vital insights into economic conditions and consumer behaviour, both of which are critical for informed macroeconomic policy decisions. With the spectre of inflation looming large, the MPC's members will be analysing these figures closely to assess whether the current trajectory merits maintaining, increasing, or potentially lowering interest rates.

Should the CPI indicate a surge in inflation, it could lead the MPC to adopt a more hawkish stance to keep inflation under control. Conversely, a stable or declining CPI might open the door to a more dovish approach, promoting growth in an already strained economic environment.

The economic backdrop remains complex as South Africa grapples with global inflationary pressures alongside domestic challenges such as power supply instability and geopolitical influences disrupting trade. In light of these factors, the MPC faces a delicate balancing act, tasked with supporting economic growth while ensuring price stability.

Neil Roets, CEO, Debt Rescue told Business Report that the real headline ahead of tomorrow’s CPI announcement and Thursday’s MPC decision is the unrelenting cost-of-living squeeze, and how little practical relief two small rate cuts have delivered to households.

He said that any benefit has been swallowed at the supermarket till and on municipal bills long before it reaches family budgets.

"July’s inflation mix tells the story: the biggest pressure points are food and basic housing-and-utilities, exactly the items people cannot postpone or substitute. With those essentials rising faster, the gap between pay-day and month-end has widened, and more consumers are relying on credit simply to bridge groceries, transport and municipal charges," Roets said. 

The repo rate sits at 7% after July’s second consecutive 25 basis point cut (BPS) cut this year, and the central bank’s July forecast still pointed to at least one more cut in 2025 and nearly two next year, with rates settling just below 6% by 2027.

Roets said that the policy backdrop has shifted.

"The Sarb has indicated a preference for inflation to settle at 3% and will use a 3% anchor in its forecasts, while National Treasury has stressed that any formal change to the 3%–6% target requires consultation and is not imminent. For households, that nuance matters because it likely stretches the easing cycle and keeps borrowing costs elevated for longer, even as budgets strain under basics," Roets said. 

Looking to the immediate data, Roets added that August CPI may ease slightly on the back of lower fuel prices, with headline inflation expected to possibly dip from 3.5% to around 3.3% month-on-month dynamics softening after July’s heavy tariff adjustments.

Frank Blackmore, Lead Economist at KPMG South Africa said that CPI is around 3.7%, which is also above that target of 3%.

"For the rest of the year we expect inflation to be higher than the 3% mark. This resulted in overall inflation of around 3.6% for the year. This is not due only to increases in prices but also to base effects given that last year's inflation in August - December reduced from 4.4% in August all the way down to 2.8% in October and therefore there's a strong base effect that will impact this year's inflation, even if month-on-month price increases are moderate," Blackmore said. 

"As a result, we think that the Reserve Bank will stick to its decision and leave interest rates unchanged at its Thursday announcement. Reasons being - the expectation of inflation is not down to that that 3% target level at this point yet and actual inflation is also above that rate," the economist further added.

"One good read is that the core inflation (removing the volatile aspects of inflation) remains at that 3% target rate and this does influence the decision to hold rates constant at this meeting," Blackmore said. 

"Yet, the lived experience is unlikely to change quickly: food and electricity remain the key upside risks, and growth is too weak to lift incomes meaningfully, so there’s no demand-side offset. Retail sales figures due alongside CPI will offer another window into how deeply consumers are cutting back, or leaning on credit, to get through the month. For many families, the monthly tug-of-war between debit orders and the grocery basket continues, and the modest rate reductions to date have barely moved the needle against essential costs," Roets further said. 

BUSINESS REPORT