You're listening to Strictly Business Podcast with Lindsay Williams. The Monetary Policy Committee of the South African Reserve Bank has decided to cut interest rates in South Africa. It says here it's reduced the policy rate by 25 basis points to 7% with effect from the 1st of August and the decision was unanimous. With me here now to discuss the decision and other matters as well is Vivian Tabra, Investment Director at 91 in Cape Town. That was very much expected, wasn't it, Vivian?
What did the governor say? What did Lesetra Cagnago say? That's probably more important. So as you say, Lindsay, it was very much expected. The market had decided that there was going to be a 25 basis point decrease given the relative dovishness that we saw in the last MPC. But as we know, I think the surprise that came out of this meeting was that they intend to target the bottom of the range going forward.
So... from now on and they certainly highlighted that there are significant benefits to this over the longer term in terms of having a lower inflation rate and having lower inflation expectations and more stability that comes with that they have decided to target three percent as the bottom of the three to six percent range that's very interesting because with the rand suddenly going through 18 and that's very much because of the strength of the us dollar after the fed last
night And also with a couple of commentators and a couple of the major banks saying that they think inflation by the end of the year will be at 4%. So with the consensus or sort of mini consensus being inflation rising, they're saying we're going to stick to inflation staying where it is, which is exactly 3%. Yes. So I think, you know, we, along with the rest of the market, are gradually looking for an increase in inflation as we move towards the end of the year.
I think in terms of the volatility that we're seeing and the weakness in the RAND, as you say, that was driven in part by the Fed. But also we are now approaching the 1st of August. So I think the market's probably also looking a little bit at what's happening in terms of what's going to happen on the tariff side. So that's also likely to have an impact. Plus, you have another impact coming from the actual decrease in the interest rates themselves.
So the RAND is facing a few... sort of minor headwinds here that it hasn't faced over the recent weeks or recent months, bar that spike we saw a month or so ago. So yes, there will be a little bit of pressure coming through from a weaker end. But I think more importantly, the pressure at the moment seems to be coming through things like food prices and particularly meat, where I think we're expecting those meat prices to start to ease a little bit.
But headline inflation is looking like it's edging up. surprisingly, core inflation is actually looking much better behaved. And I think there's been a bit of a focus on that as well. And certainly core, we continue to see coming in slightly lower than market expectations. What about the round 18, 12, 18, 13, as we speak, Vivian, that's something that the Reserve Bank has very little control over, given the fact that it is pushed and pulled around by events globally.
There is a concern, isn't it? Because if the round goes weaker, we import inflation. Yes, we do to a certain extent, but I think we should also be cognizant of the fact that we incline to focus very much on the RAND dollar exchange rate, whereas we should be focusing more on the trade-weighted RAND. And, you know, the dollar has now in this pullback strengthened against everything. It's not just against the RAND. So in terms of the trade-weighted RAND, it's performing somewhat better.
The target is now 3%, which is the bottom of the 3% to 6%. target range. Was anything said on inflation targeting? Because that's been a hot topic recently. Well, I think Lesetra made it very clear that they're using the same sort of rationale as they did from when they moved from six to four and a half.
In this move from four and a half to three, they have obviously highlighted that there's ongoing technical discussions and technical groups between Treasury and the South African Reserve Bank with regard to what will happen to the official target. So for the moment, the target remains 3 to 6, but they are focusing on the bottom end of the target. And I think they made that very clear. How has the bond market reacted?
So it was certainly expecting the move and the market had reacted a little bit to that, sort of weakening a little bit. But if we look at it now, we have seen that the 10-year bond has gone from 982 down to 972. So we've seen yields rally 10 basis points on the back end. That's a very nice move, actually, considering the performance of the RAND that I keep on mentioning.
Do you think that you'll sit down with your team tomorrow and say, OK, 25 basis points, these comments came out, so we'll keep our policy and our strategies the same? Or is there anything that you would say, no, I think we ought to be tweaking our strategy a little bit, given what we've just heard? I think, you know, in terms of our strategy as a team and what we were expecting, we were expecting this, but we were also expecting inflation to rise a little from here.
We're expecting the inflation target to be addressed, but only towards the medium term budget statement. So a couple of months of sort of the Saab doing what it is doing without sort of having the backing of South African Treasury, so to speak. So it's pretty much been in line with our expectations. So I think, you know, we positioned ahead of this. we are relatively constructive on South Africa. fixed income overall.
And certainly this drop that we're seeing now means that, you know, overall borrowing costs are coming down, both in the short end for the consumer, but also overall for government, as we see sort of the 10 and longer end of the curve move lower. Final question, Vivian, do you expect any more cuts this year? We do not expect any more cuts for the moment. But I think, you know, that is data dependent. As Lissette also likes to say, we will be closely watching what happens in the RAND.
and what happens to food prices and particularly to administered prices and inflation expectations. Vivian, thanks so much for your time. Vivian Tabor is Investment Director at 91 in Cape Town. The views and opinions expressed in these podcasts are those of Lindsay Williams and various contributors and do not reflect the policy, position or opinion of any other agency, organisation, employer or company associated with StrictlyBusinessPodcast.com.
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