Economists expect the repo rate to be cut again on Thursday, but not by the 50 basis points many had hoped for due to the strengthening dollar following Donald Trump’s victory in the US election.

The South African Reserve Bank’s (Sarb) Monetary Policy Committee (MPC) will decide the repo rate this week, while Statistics SA will also announce the inflation rate for October on Wednesday.

The Sarb has a constitutional mandate to protect the value of the rand by keeping inflation low and stable and uses interest rates to influence the level of inflation. To protect the value of the rand, the Sarb currently uses inflation targeting to keep consumer price inflation between 3% and 6%.

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BER: repo rate cut by 25 basis points

Lisette IJssel de Schepper, chief economist at the Bureau of Economic Research (BER), says the BER forecasts a further slowdown in inflation, largely driven by a double-digit decline in the gasoline price component of the CPI .

“Sarbe should welcome the slowdown in inflation, but this will not be a reason for the forward-looking central bank to reduce the repo rate. However, expectations that inflation will stabilize around 4.5% in the medium term are expected to lead to a further 25 basis point reduction in the policy rate.

“Even though many uncertainties remain about the real impact of a Trump presidency on the global economy, the fear that his policy will be inflationary and/or lead to a stronger dollar and a weaker rand, means a 50 basis point reduction is unlikely. However, this is also unlikely to deter the Sarbs from reducing their cuts.

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ETF: 25 basis point drop in repo rate

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say it was clear that a busy electoral calendar around the world would immediately increase political and fiscal risks, while maintaining volatility markets.

“At the start of the year, our own forecasts predicted that the MPC would begin cutting interest rates in July after the South African elections, but this was delayed until November due to volatile economic data and market reactions, then we brought forward our forecasts to September.

“Our expectations for the final MPC meeting for 2024 remain intact, with a further reduction of 25 basis points. Like the Fed and the Bank of England (BoE), the Sarb will probably find it too early to reflect on the practical implications of Donald Trump’s second presidential term and will in any case avoid contributing to the political debate.

They say that while it does not formally address the risk from Trump’s announced policy changes, the MPC will be attentive to potential economic implications.

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Potential risks from Trump’s policy changes

“First, the implementation of significant tariffs on US imports and retaliation by targeted countries could keep inflation higher than expected. Reduced immigration to the United States and increasingly right-leaning advanced economies could also increase labor costs.

“Higher inflation could also have a negative impact on risk assets, with a further impact on monetary policy in emerging markets. Second, looser fiscal policy in the United States and other regions, now encouraged to spend more on their own defense, either to appease the Trump administration or to protect against its foreign policies, could reduce effectiveness monetary policy, pushing it to be stricter. Global growth is also likely to be even slower, worsening the monetary policy dilemma.”

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Nedbank: further reduction of 25 basis points in the repo rate

Nicky Weimar, Johannes (Matimba) Khosa and Isaac Matshego, economists at the Nedbank Group Economic Unit, also expect a further 25 basis point cut in the repo rate as inflation continues to be lower to the Sarb objective of 4.5% and that the outlook remains gloomy. However, they say, upside risks have increased somewhat over the past month.

“Inflation fell further below Sarb target in September. The downward trend is expected to intensify and widen in October, amplified by a further sharp decline in local fuel prices caused by the virtuous combination of falling global oil prices and the strengthening of the rand. We expect headline inflation to fall to around 3.3% in October.

They point out, however, that upside risks to the inflation outlook have increased slightly since the September MPC meeting. “The biggest risk lies in the likely change in US economic policy over the next four years after Donald Trump wins the US election.

“The proposed combination of tax cuts, tariffs and mass deportations will likely have a reflationary effect and could potentially raise the floor on US interest rates in the medium term. The tariff plan also poses significant downside risks to global trade and global growth prospects, with adverse consequences for China’s already struggling economy.

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Risk of Trump’s policies

According to them, given that China is the world’s largest consumer of raw materials, the tariff plan could depress raw material prices, weighing on export earnings, terms of trade and, therefore, the currencies of many developing commodity-exporting countries.

“Furthermore, the significant uncertainty surrounding the future direction of U.S. economic policy and foreign relations in a world already rife with tension and conflict will tend to weigh on risk appetite going forward. towards emerging markets (EM) and favor a stronger US dollar, thereby amplifying downward pressure on emerging market currencies.

“Overall, we believe conditions remain favorable for further monetary policy easing. Therefore, we expect a further cut of 25 basis points in the repo rate, followed by a further reduction of 75 basis points in 2025, bringing the repo rate to 7% and the prime rate to 10.50 % by the end of next year. If inflation and interest rates align with our forecasts, the real pension rate will remain above 2% throughout 2025.”