Warning over interest rate cuts in South Africa

The South African Reserve Bank (SARB) is widely expected to start cutting rates in September, but economists have warned debt holders to be realistic about what’s coming: the cycle will be slow, and likely end with interest rates still higher than they were pre-Covid in 2019.

Stats SA’s data showed that inflation dropped from 5.1% in June to 4.6% in July – below the Bloomberg consensus of 4.8%. The latest inflation figure is just 0.1 percentage point above the SARB’s target of 4.5%.

Moreover, the rand exchange rate remained relatively strong throughout the week, while oil prices traded below $80 per barrel, boosting the near-term inflation outlook.

This has led to a wave of optimism surrounding the SARB’s next meeting in September, where it is said that the “door is wide open” for interest rate cuts in the country.

Minutes from the US Federal Reserve meeting also provided firm guidance that an interest rate cut is likely for September in the States, further adding to the call.

However, Bureau for Economic Research (BER) chief economist, Lisette IJssel de Schepper, cautioned against getting too excited over the latest data and its impact on the coming cycle.

“A member of the SARB’s monetary policy committee (MPC) would probably tell you that a lower historic inflation print does not determine forward-looking interest rate decisions, so this week’s data is not that important,” she said.

“But, of course, a lower starting point matters.”

IJssel de Schepper said that the data is checking all the boxes necessary for an interest rate cut—with many data points even better than expected.

“The fact that the electricity component of CPI was somewhat lower than the SARB’s latest forecast should help with a lower inflation profile going forward, as this price increase will largely determine the annual rate of change until the next survey of electricity prices.”

The SARB’s oil price forecast for 2024 is also on the higher side if current price dynamics continue. Signs of weaker demand for oil as markets remain well supplied contributed to a downward move in the Brent crude price.

“The oil price, however, remains sensitive to news from the Middle East, with hopes for a ceasefire between Hamas and Israel once again fading,” she said.

Not as big as before

However, she noted that nothing has happened to deviate from the expected slow and shallow rate-cutting cycle.

Looking at interest rates, the July CPI figure has reinforced the BER’s view that the MPC will cut the repo rate in September from its 15-year high of 8.25%.

The magnitude of the cut depends on the inflation expectations survey (coming out on 12 September – a week before the MPC meets), while the SARB will watch the Fed decision in its own September meeting.

Although a 50 basis point cut would not be unwarranted, the BER still has a baseline of 25 basis points.

“But for now, it is still difficult to tell a story of significantly more easing than the 100-125 basis points we have pencilled in.”

Other economists and analysts, including those from Nedbank and Standard Bank, also expect 50 basis points of cuts in 2024 and another 50 basis points in 2025.

Although lower borrowing costs could offer consumers some relief, interest rates are unlikely to return to levels seen at the start of the decade.

After the Covid-19 outbreak, the MPC lowered the repo rate by 300 basis points from 6.25% in January to 3.25% in July.

Due to inflationary pressures, the SARB’s interest rate hiking cycle raised the repo rate by 475 basis points from 3.5% in November 2021 to 8.25%.

Despite being less restrictive, South Africans should not expect a far shallower cutting cycle in 2024 and 2025 than the one seen in 2020.

Even with the repo rate being cut by 100 to 125 basis points, it would remain between 7% and 7.25% — 100 basis points higher than the 6.25% seen at the start of 2020 before the Covid-19 cutting cycle began.

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