Opinion: Impact of lower repo rate on South Africa's agricultural sector
By Sakhumzi May
In October 2024, South Africa's annual headline consumer price inflation (CPI) decelerated to 2.8% year-on-year (y/y), the lowest level since June 2020, when it stood at 2.2% during the height of the Covid-19 pandemic. This significant decline raised expectations that the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) would further lower the repurchase rate (repo rate).
Following the initiation of a rate-cutting cycle in September 2024 the first in four years, the move was largely influenced by a global decline in inflation and rate reductions in major economies, driven by easing fuel prices worldwide.
On November 21, 2024, SARB’s MPC announced a 25-basis-point reduction in the repo rate, lowering it from 8.00% to 7.75%. This decision aligned with market expectations, given the substantial slowdown in domestic inflation, which fell to 2.8% in October 2024 below the SARB’s target range lower bound of 3.00% and significantly beneath the 4.5% midpoint compared to 3.8% in September.
While the global geopolitical risks posed by the Ukraine-Russia war and the Middle East conflict could elevate fuel and food prices, inflation expectations remained moderate. This domestic rate cut mirrored similar actions by the European Central Bank in October and the Bank of England and U.S. Federal Reserve in November.
Implications of Lower Interest Rates
Lower interest rates have broad implications. For consumers, the reduction is likely to enhance household balance sheets and increase disposable income, easing the burden of rising debt servicing costs, high fuel prices, elevated municipal tariffs, and food expenses. This improvement in disposable income may drive higher demand for agricultural products, especially high-value items often forgone during periods of financial strain.
From an economic growth perspective, prospects are optimistic. The SARB projects GDP growth of 3.0% in 2025 and 3.1% in 2026, supported by reduced load shedding, a lower interest rate cycle, and improvements in logistics infrastructure. These factors collectively position the agricultural sector for growth. A sustained decline in inflation and interest rates could lower business costs for farmers while simultaneously boosting consumer demand for agricultural goods.
Impact on the Agricultural Sector
For the agricultural sector, a lower interest rate environment is expected to reduce financing costs, including borrowing for enterprise expansion and servicing existing debt. Over recent years, farmers have faced a cost squeeze due to high interest rates and elevated input costs such as fuel and agrochemicals. Lower rates provide an opportunity for improved financial resilience, profitability, and growth within the sector. Additionally, banks may observe a reduction in non-performing loans as farm-level balance sheets strengthen.
In summary, the easing of the repo rate aligns with global trends and domestic economic conditions, presenting a favourable outlook for consumers and the agricultural industry alike. As disposable incomes rise and financing costs decrease, the sector is well-positioned to capitalize on improved demand and profitability.
Sakhumzi May is the Chief Agricultural Economist in the Agriculture Economics and Advisory division of the Land Bank. Please follow the Land Bank on: @Land and Development Bank of South Africa; LinkedIn: @Land and Development Bank of South Africa
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