Where to next for interest rates in South Africa

Economists remain divided on where interest rates will head next, with a hold or a hike both on the cards.

Nedbank’s latest Guide to the Economy shows that inflation has now returned to within the South African Reserve Bank’s target range of 3% to 6%.

Headline inflation did rise from 4.7% in July to 4.8% in August, with higher fuel prices, a rise in global oil prices and the weaker rand blamed for the slight uptick.

However, food prices continued to moderate, declining from 14.4% in March to 8.2% in August.

“Subdued global food prices, less severe load-shedding and private firms’ ongoing transition to renewable electricity sources probably contributed to the downward trend,” Nedbank said.

Core inflation also increased marginally from 4.7% in July to 4.8% in August but was still off the high of 5.3% in April.

The group expects inflation to go slightly higher for the rest of the rest of the year due to high global oil prices and a depreciating currency. That said, domestic demand will control the rise in inflation, as companies cannot simply pass cost increases to consumers without hurting sales.

Inflation is expected to hit just over 5% by the end of the year, before dropping towards 4.5% in the second half of 2024.

“The outlook still faces considerable upside risks from the cost implications of load-shedding, a vulnerable rand, the threat of El Niño, the impact of the recent bird flu outbreak, and trade restrictions in some countries,” the group said.

The SARB’s Monetary Policy Committee (MPC) kept interest rates unchanged in July and September, but two of the five members voted for another 25 basis points hike at both meetings.

“The MPC remained concerned about the upside risks to the inflation outlook due to tight global oil markets, high electricity tariffs, a weak rand, and the threats posed by load shedding, logistical constraints, and potentially drier weather conditions to food prices,” Nedbank said.

Despite these concerns, it believes the MPC will leave interest rates unchanged for the rest of this year.

“We believe that monetary policy is restrictive enough to return inflation to the 4.5% target and, therefore, anticipate mild policy easing throughout 2024,” it said.

Mixed consensus

That said, Bank of America economists Tatonga Rusike and Mikhail Liluashvili said that pressures on inflation will likely result in the MPC raising interest rates.

“Higher oil prices and an outbreak of bird flu – leading to shortages of poultry products – will likely raise food prices in the near future,” they said.

“Oil prices are also close to $90 per barrel, while USDZAR is weakening near-term. A strong USD to year-end means a weaker ZAR as global interest rates are set to stay higher for longer. Near-term fiscal risks are likely concerning for the SARB as well.

“The South African Reserve Bank (SARB) is likely to hike rates by another 25 basis points at the November MPC before initiating cuts in the second quarter of 2024.”

This sentiment was shared by economists at the Bureau for Economic Research (BER), who noted that the rand’s recent losses and the threat to oil prices following the war between Hamas and Israel worsened the inflation outlook.

“With this in mind, there is a rising probability that the SARB’s MPC will increase the repo rate by another 25 basis points (to 8.50%, prime rate to 12%) at its next meeting on 23 November,” the BER said.

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