The South African Reserve Bank (SARB) will announce its interest rate decision today.

In its July meeting, the SARB unanimously cut the repo rate by 25 basis points to 7.00% from 7.25%, the lowest level since November 2022. Since then, the rand has strengthened by 73 cents to R17.48, supported by a weaker US dollar.

Even with inflation near the bank’s target, Economics and Policy Editor Bheki Mahlobo expects that the SARB may hold rates steady. A reason for this is the interest rate differential between South Africa and the United States (the difference in rates between the two countries). Because of South Africa’s risk profile, the country needs to justify portfolio investment by keeping its rates significantly above those in the US. This higher rate gives foreign investors an incentive to keep money in South Africa, which supports the rand and helps control inflation.

Yesterday, the US Federal Reserve cut its rate by 25 basis points. After this move, the gap between South African and US rates stands at 3%, only half the 6% average of recent years. Therefore, if the SARB cuts rates today, the gap would shrink to 2.75%. This could weaken the rand and drive up the cost of imports.