Is it just me, or does this 25 basis point cut feel like a slap in the face?

After much dithering, the Monetary Policy Committee of the South African Reserve Bank (SARB) finally kicked-off South Africa’s interest rate cutting cycle, on 19?September?2024. It was a bit of a non-event , offering a mere 25 basis points of relief to consumers who have had to stomach multiple interest rate hikes since November?2021. To offer a tongue-in-cheek ‘mixed and flipped’ metaphor:

This cut was a bit like ordinary consumers creeping 25 basis points forward; but only after having been forced to stagger 475 basis points backwards.

Why not a more meaningful cut?

Put differently, dear reader, this long-suffering consumer would have preferred a more meaningful cut. Even though envy (jealousy) is among the seven deadly sins frowned upon in most religious teachings, your writer could not help but feel envy for his United States counterparts who are lapping up their latest 50 basis point ‘gift’ from the US Federal Reserve.

PS, there were even some rumblings from the MAGA camp that this aggressive move was somewhat of an election ploy, putting the ‘blue’ in good standing; but that is something best left for Fox News and MSNBC to debate.

Us ordinary folks are more interested in whether the South African authorities will take the hint from their developed market peers and accelerate the interest rate cutting cycle over the coming months. As the SARB announcement dropped, respected financial broadcaster and journalist, Jeremy Maggs , interviewed Investec Treasury Economist, Tertia Jacobs , about the much-anticipated rate cutting cycle.

The host used his ‘No Ordinary Wednesday’ podcast to explore a multi-factor environment spanning inflation and interest rates, and the impact of these on the bond market. First, a brief history lesson to position the talk. “Since 2021, the main focus of global central banks has been on combating inflation which has led to aggressive rate hikes, in many instances,” Maggs said. “With inflation retreating closer to target, a moderation in growth allows for lower interest rates.” He then asked the all-important questions:

What kind of rate cutting cycle is the world going into? Will it be gradual or front-loaded? And what impact will this cycle have globally and in our corner of the world?

Dual mandate: inflation and full employment

“The US Federal Reserve has a dual mandate of inflation and full employment,” said Jacobs. [As a quick aside, the South African central bank’s interest rate decisions take place under an inflation targeting mandate.]

How aggressively the US cuts rates, and how fast, hinges on which of the two factors carries greater weight. Decision makers in the Fed therefore keep a close watch on inflation, which was down to 2.5% in August 2024, and the US labour market, focusing on jobs growth and unemployment levels. If you study economics, you will understand that jobs data feeds into models for both inflation and economic growth.

According to Jacobs, the US growth outlook is carrying more weight than the inflation outlook at present. “There [are signs of] a slowdown, but no one is yet saying that there is a meaningful decline in economic growth; and that will shape the debate,” she said.

And then, an interesting ‘reveal’. It turns out the US was probably only going to cut once this year, and in this context may have decided to double-up on their usually cautious 25 basis point increments to instil a sense of optimism heading into that country’s November 2024 elections.

South Africa is a different cup of tea; but as the headline suggests, your writer felt the 25 basis point cut was somewhat of a slap in the face; he had to squint to see the savings on his R1?million home loan.

Commenting on the cut, Toni Anderson , Head of Standard Bank Home Services, said the first cut in four years was “widely anticipated” and represented “a start to some much-needed relief to households that have struggled with high inflation and steep debt servicing costs over the past two years.”

For some good news, the bank expects three additional rate cuts of 25 basis points each before the end of the year, potentially freeing up R833,00 per month on a R1?million bond repayment.

That pesky 3-6% constraint

As noted earlier, the SARB weighs up interest rate in the context of keeping inflation within a 3-6% target range. “There has been encouraging news on the inflation front over the past couple of months, and we have seen the headline CPI inflation receding from above 5% to 4.6%,” Jacobs said.

The primary drivers of this improvement include lower global oil prices, falling to around USD71,00?per barrel, and a stronger rand. Need proof, just stop at any local petrol station to refuel your car. Petrol prices have dropped significantly in August and September of this year. The stronger rand has eased imported inflation, and food price inflation is down to 3.9%.

The cautious 25 basis point cut is explained by the SARB’s desire to keep inflation sustainably lower. Remember, if they cut rates too fast, consumers end up with much more cash to play with, and the risk is they spend this cash, driving the prices for goods and services higher. This is true, generally, but your writer contends that South African households are so bombed out by the multi-year, high inflation landscape, that the windfall from lower rates will probably be diverted to servicing debt, especially chipping away at credit card balances and personal overdrafts.

So, in this context, will we see the SARB follow the US approach of up-front loading of the cuts? “Inflation has come down faster than what we anticipated,” mused Jacobs, before conceding that the SARB would likely take a steer from the US and other central banks insofar the front-loading of rate cuts. She said:

There is definitely scope for the SA Reserve Bank to front-load rate cuts; if they decide to do so it may not necessarily mean more cuts, but they could cut earlier.

Another interesting observation is that food and fuel prices are quite volatile, meaning that decision makers tread wearily around inflation improvements off the back of these measures.

Two-pots could play a part

As economists wrestle with how inflationary the 25 basis point ‘gift’ might be, the have to factor in another known unknown. It is well documented that the 1?September?2024 introduction of the two-pot retirement solution will free up billions of rand into the domestic economy, as consumers dip into their savings.

"Pension funds are dealing with huge demand [for savings pot withdrawals] which will be a significant income stream,” the Treasury Economist said. She argued that household income boosts from rate cuts, lower inflation and retirement fund withdrawals had the potential to push inflation higher, perhaps explaining the SARB’s cautious approach.

The threat landscape does not end there. Economists are also holding a watching brief over developments in the Middle East; as the Hamas-Israel war spills over into neighbouring countries, there is a real risk that oil prices could shoot through the roof again. Since 2020, the world has stumbled from one crisis to the next, with each crisis putting upward pressure on food and oil prices. As the SARB processes the likely impact of geopolitics, they must also weigh up Eskom’s ridiculous electricity price demands.

Rate cut gobbled up by electricity price craziness

Yes, dear reader, Eskom may have pulled the plug on load-shedding; but it appears they are trying hard to find other ways to plunge households into darkness. An article published late-August on Daily Maverick reveals that the state-owned electricity producer has requested a 44% electricity price hike for 2024-25; and we all know that municipality’s tamp their own margin on top of that.

That 25 basis point ‘slap in the face’ will be quickly eroded by this inflation craziness.