Big turn for interest rates in South Africa

 ·19 Jul 2023

South Africa’s better-than-expected inflation print for June 2023 makes the likelihood of the South African Reserve Bank (SARB) holding interest rates this week far higher, economists say.

Stats SA published the latest inflation figures for June 2023 on Wednesday (19 July) showing that headline inflation has dropped significantly year on year to fall within the SARB’s target range.

Inflation was recorded at 5.4% for the month, down from 6.3% in May 2023. This was lower than market expectations of around 5.6%. Core inflation was also down to 5.0%, from expectations of 5.1%.

This has completely turned expectations for the Reserve Bank’s next interest rate move, which was previously pegged as a “close call” leaning toward another hike.

According to economists at Nedbank, before the release of Wednesday’s inflation print (19 July), the group expected one last 25 bps rate hike from the SARB on Thursday.

“Given the uncertainties surrounding load-shedding and the rand, we felt that the Monetary Policy Committee (MPC) would remain cautious,” it said.

However, the much-improved inflation numbers now strengthen the case for no further hikes.

“The better-than-expected outcome comes on top of the rand’s pullback to below R18 to the US dollar, a faster deceleration in US inflation, and more evidence of slowing global and domestic demand.

“(Thursday’s) rate decision will still be a close call, but inflation’s return to the target range increases the probability that the MPC will leave interest rates unchanged, which could be the peak in the rate cycle,” the bank said.

For Investec, the inflation print cemented its already-optimistic view.

Investec chief economist Annabel Bishop previously noted that market conditions were already primed for a hold on interest rates in July – and that any downside risks would only lead to a small hike later on.

However, following the print, the economist said that a hold is highly likely, marking the end to the interest rate cycle.

“Looking forward, South Africa’s forward rate agreement (FRA) curve has not factored in an interest rate hike for July – not even a 25bp lift. No hikes are expected for the rest of this year either, tying in with our expectation of no more hikes in the South African interest rate cycle,” Bishop said.

“The rand’s appreciation against the US dollar, from R20.00/USD in June to below R18.00/USD this month, reaching R17.80/USD (on Tuesday), is positive for the SARB’s inflation forecast, and so for its monetary policy decisions.”

The Reserve Bank’s MPC will announce its decision on Thursday, 20 July.

Read: Good news for South Africa as inflation eases dramatically

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