Kganyago on repo rate cut prospects

Well, central banking is never easy. But there is no doubt that South Africa is in a much better space than this time last year. We still have elevated uncertainty and whether you look at in terms of the economic uncertainty indices are up, trade uncertainty indices are up, geopolitical uncertainty indices are up. So the uncertainty is now part of what we actually have to look at. But let us look at where South Africa itself is in the context of this uncertainty. South Africa is in a much better space in terms of the macro. From a monetary policy perspective the reforms that we have embarked on are yielding results. We now have a lower inflation target which is in line with the peers and this inflation target is also underpinned by a new monetary policy implementation framework. The announcement that the adoption of a new target we had seen led to a decline in the cost of borrowing across the economy. The government yield curve had actually shifted lower and we had actually seen the return of foreign bond investors into our market. So that has been positive. The second aspect of this has to do with fiscal. Now fiscal is reinforcing what monetary policy has done. The path of fiscal consolidation that had been announced by the government, we can now look back and say that we can show progress in terms of the fiscal consolidation path that we had embarked on. And last night the minister of finance was talking at the South African night that he expects that debt to GDP ratio will peak at the end of the current fiscal year that ends in March and that from there onwards we are going to then see a decline in the debt to GDP ratio. That is positive. And the last thing has to do of course with growth and the structural reform agenda. Firstly that the minister did state that the national treasury has been reprioritizing and allocating money more towards a growth friendly expenditure including the creation of an infrastructure fund and the launch of an infrastructure bond. We have seen reforms in the electricity sector and now we are taking it for granted that on our TV screens we no longer have a flash that says that load shedding is expected for so many hours or for so many days. So the electricity sector reforms are also beginning to yield results. And lastly the logistics sector. At the moment the commodity prices are favoring us. Gold, platinum, we can take that out. You can put that in an aeroplane, no problem. But South Africa is also home to important bulk commodities, iron ore, manganese and coal and that stuff. That stuff needs a very functioning logistics system and we have not been able to get all of those out to market and that is why it was important to open up the sector and bring private sector players in that space.

Actually the other way. Higher inflation begets higher interest rates. I had indicated South Africa had entered the era of a low inflation economy. Low inflation begets lower interest rates. Since we began the cutting cycle, we have cut by 125 basis points. So, South African borrowers are beginning to feel that. I'm not sure about the savers, but if you are a long-term saver who had invested in South African government bonds, you are actually smiling all the way to the bank because the bond yields have declined, which means that the price of your investment has actually gone up. The thing about reforms is that reforms have got to be seen in an intertemporal function. In other words, short-term pain for long-term gain. So the reforms that we had embarked on immediately there might be a pain but we are seeing the results. You know we are expecting growth this year of about 1.4%. Still pretty modest. We need to accelerate growth beyond 2%. But we tend to forget that at that growth we are almost like growing at twice the pace that we grew at in 2024. But there is no doubt for us to make a dent, to make South Africans feel the effects of this reform program that you actually need to have growth so that South Africans can actually feel that.

Domestically yes, but let us also understand that there will always be shocks whether you are targeting 3% or you're targeting 4.5% or you are targeting 6% or 10% there will always be shocks and we do not know what the nature of those shocks are. Earlier on we talked about the uncertainty and it becomes a forecaster's nightmare and even us with a whole team of PhDs that model the South African economy they cannot model this uncertainty. And so what has central banks been doing across the world is to then present scenarios and even us we then with every MPC statement we will present, this is our forecast. However, there are the following uncertainties. And if this scenario plays out, this is how we expect the economy to evolve and this is how we expect policy to evolve. These scenarios are not themselves forecasts. They are just plausible scenarios that says if these things happen, this is what would happen. So just in case when things come out and he says how come you didn't think about it, that we will be able to go back to the scenario and say we did pen out this scenario and this is how we expect it to go.

We actually would prefer to get rid of the prime rate. It is not a very useful reference rate. There had been internationally a reform of reference rates whether it was LIBOR and if you were in London people would be pricing saying that so much above LIBOR and in South Africa we used to be saying so much above JIBAR. We are getting rid of JIBAR. We are replacing JIBAR with ZARONIA, the South African overnight interest rate. And we also had to look at this. The thing about the discussions about the prime rate is that when rates are going up or are higher, that discussion does not feature. It always features when rates are going down because then people start to look at this and they say what is this thing now, give me a price. So, think of it, you are borrowing at prime. The repo rate is 6.75% and so you are borrowing at prime and 6.75% plus 350. Actually your bank can say to you we are lending to you at the repo rate plus 350 points instead of talking about prime. We had done studies on this previously. These discussions are taking place around the world. I mean you had seen in the US the US is also having those discussions so much so that the president pronounced and he just came up with a figure and says oh the interest rates on credit cards must be kept at 10%. I don't think that that is where we would like to get to. We would like to have much more transparency so that consumers know what is actually going on and we are doing this study and we are comparing across the world. I think that the most natural outcome would be that we just get rid of prime. It caused so much confusion in 2007-2008 during the crisis and that the problem came from what was called subprime mortgages.