Interest rate warning for South Africa
Momentum has warned that South Africans should not expect interest rates to return to pre-pandemic levels in the next year.
Momentum Investments said that factors influencing monetary policy decisions have improved globally and domestically since April.
That said, there are several risks facing the outlook.
“Due to central banks remaining cautious and the observation of a higher global r-star (the long-run real neutral interest rate), the South African Reserve Bank (SARB) flags that global interest rates will likely end 2025 at a higher rate than pre-pandemic levels,” said Momentum Investments.
The SARB started aggressively hiking rates following the COVID-19 pandemic, bringing the repo rate to a 15-year high of 8.25% in 2023.
In September, the Reserve Bank cut the repo rate by 25 basis points, bringing it to 8.0% and the prime rate to 11.50%.
Economists expect further cuts in relief in November 2024 and into 2025.
On the global front, inflation has eased without causing a significant economic downturn. Inflation is expected to continue to moderate.
Therefore, global central banks have embarked on a monetary policy easing cycle.
“However, the SARB notes that central banks and the market are approaching the monetary policy easing cycle cautiously on the back of still elevated core inflation, driven by sticky services inflation and tight (albeit cooling) labour markets, and possible inflation shocks such as rising geopolitical tensions,” said Momentum.
“As such, global interest rates are expected to remain higher than pre-pandemic levels by the end of 2025.”
The repo rate stood at 6.50% before the pandemic, but many economists expect rates to hit only the neutral level of roughly 7.0% in late 2025.
Prior to the easing cycle, central banks warned that cutting rates too early could cause inflation to rear its ugly head.
The risk materialised in Brazil, which was forced to increase interest rates in September. Further interest rate hikes are expected in South America.
Returning to South Africa, the inflation rate eased from 5.2% in April to 4.4% in August—below the SARB’s target midpoint of 4.5%.
“Recent disinflation has been supported by lower Brent crude oil prices and a stronger rand,” said Momentum.
“Furthermore, the inflation trajectory has substantially improved, and the assessment of risks to the inflation outlook has improved from being viewed as tipped to the upside and to a more balanced outlook.”
“Unlike globally, SA’s core inflation is contained and is expected to undershoot the midpoint of the inflation target in the medium term.”
The SARB noted that global growth is weaker than the long-term average but remains resilient.
South Africa’s trading partners are predicted to see growth of 2.7% in 2024 (2023:3.0%), meaning that global growth will unlikely provide impetus for domestic growth and inflation.
“South Africa’s easing energy constraints and moderation in inflation have not yet translated
meaningfully into higher economic growth.
Growth is expected to improve from an estimated 1.1% in 2024 to 1.8% by 2025 due to higher real disposable income and continued growth in fixed investment.
The group added that shocks to South Africa over the last few years, including the pandemic, load shedding and the July 2021 unrests, have severely impacted economic growth.
“Getting back to what economic growth would have been in the absence of these shocks is possible but would be difficult. The economy would need to achieve an average annual growth rate of 3.2%, which is more than twice the currently projected average of 1.4%, by 2026.”
Loading ...
