What to expect from the Reserve Bank’s interest rate announcement this week

 ·18 Sep 2023

Economists are optimistic that interest rates will stay on hold this week – but there are still some risks that the Reserve Bank might factor into the decision.

The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) will be meeting this week to vote on the next step forward for interest rates in the country.

Following the MPC’s penultimate meeting for the year, the committee will make its announcement on Thursday (21 September).

While Reserve Bank governor Lesetja Kganyago kept the door wide open for more interest rates hikes in the country following the MPC’s last meeting, sentiment around rates has shifted significantly among analysts and economists.

Following July’s hold on rates at 8.25%, the market was still weighing a call that the hike cycle had officially ended against a possible further hike of 25 basis points.

However, inflation data published in August (for July) saw CPI fall more than expected to sit comfortably within the SARB’s target range of 3%-6% – a position it needs to retain for the MPC to stop the hike cycle.

This led to a big turn among fund managers and economists, where both groups felt more comfortable calling an end to the hike cycle.

Inflation jitters

Economists are still optimistic that the Reserve Bank will continue to hold on rates this week, but it’s not all smooth sailing.

The Bureau for Economic Research (BER) noted that inflation is likely to be under pressure in the coming months due to higher fuel prices and other factors – such as the return of high stages of load shedding.

Despite these pressures, however, the group believes that the SARB will look past the short-term pressures (especially for September and October) and keep rates at 8.25%

Economists at Nedbank and Investec have a similar view.

Investec chief economist Annabel Bishop noted previously that while higher fuel prices are a pressure point for inflation, their weighting is not so great as to be world-shifting for rates.

Petrol prices account for 3.5% of the CPI basket, while diesel prices only account for 1.4%, she said.

Any near-term upward inflationary pressure also does not reflect a complete turn, she said, adding that the rate should move back to the South African Reserve Bank’s midpoint of 4.5% for most of 2024, with the potential to drop to 4.0% by the end of next year.

Like the BER and Bishop, Nedbank also flagged “mild upward pressure” from higher fuel prices and rising domestic input costs due to the jump in electricity tariffs, the return of severe load shedding, and continued rand weakness.

“(However), we still expect food prices to fall further off a high base, contained by generally subdued global prices, weaker domestic demand, and reasonably healthy stock levels.

“Core inflation is forecast to stay below 5%, kept in check by shrinking consumer demand as the squeeze from the earlier aggressive rise in interest rates intensifies.”

On balance, Nedbank said the MPC has already done enough to ensure inflation’s return to the midpoint of the target range.

“Consumer demand is shrinking, credit growth is slowing, and debt defaults are rising. Although load-shedding, concerns over the potential impact of El Niño, and the weaker rand pose upside risks to the inflation outlook, these mainly stem from the supply side of the economy,” it said.

The more hopeful outlook does come with a warning, however:

“The tone of the MPC statement will probably remain hawkish since the risks to the inflation outlook are still tilted to the upside,” Nedbank said.

Read: What to expect from interest rates in South Africa after record petrol price hikes

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