Where to next for interest rates in South Africa
The South African Reserve Bank (SARB) decided to keep interest rates on hold yesterday, with economists now predicting that rates will start getting cut from next year.
Despite two members of the SARB’s Monetary Policy Committee (MPC) voting to hike rates by 25 basis points, three members voted to keep them on hold. This kept the repo rate at 8.25%, with the prime lending rate at 11.75%.
Although headline inflation dropped dramatically over the last few months, SARB governor Lesetja Kganyago said that risks remain to the future outlook.
Consumer price inflation grew from 4.7% in July to 4.8% in August, with the SARB expressing concerns over fuel and food prices.
Although the bank dropped its headline inflation forecast for 2023 from 6.0% to 5.9%, it upped its duel price inflation forecast from -3.1% to 0.4% due to higher global oil prices and the weak rand.
The food price inflation forecast was also upped from 10.3% to 10.4% due to concerns about the drier conditions associated with the El Nino weather pattern.
“Overall, the SARB’s inflation forecasts indicate a continued moderation in price pressures. However, it still considers the risks to the inflation outlook to be tilted to the upside due to tighter global oil markets, elevated domestic food prices, load-shedding and logistical constraints,” economists at Nedbank said.
Despite these concerns, Nedbank’s economists expect the headline inflation will likely trend close to the 4.5% midpoint from Q3 2024 due to slowing domestic demand.
“Shrinking retail sales, slowing credit demand, and rising arrears on loans to households suggest that the MPC has done enough to ensure inflation’s return to the midpoint of the target range,” the economists said.
“Consequently, we forecast no further rate hikes for this year, followed by a 100-bps cut throughout 2024, taking the repo rate to 7.25% and the prime lending rate to 10.75%.”
The MPC’s next meeting is scheduled for Thursday, 23 November 2023.
US relief
A day before the MPC’s decision, the US’s Federal Open Market Committee (FOMC) also decided to keep the federal funds target rate unchanged at 5.25% – 5.50%, with Investec Chief Economist Annabel Bishop also expecting no further interest rate hikes in the world’s largest economy.
The Fed’s projection said that core PCE inflation will start returning close to the implied target of 2% range over the next few years, dropping from 3.7% in 2023 to 2.6% in 2024 and 2.3% in 2025.
Bishop noted that interest rates take a while to effect inflation, with the lag taking possibly two to three quarters initially and the full effects taking 12 to 18 months.
“While the Fed members signal the possibility of another hike, this is likely aimed at quelling inflation expectations and is not widely expected to transpire. In SA as well, markets expect no further hikes this year and cuts from next year,” she said.
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