Interest rate joy around the corner for South Africa

 ·27 Nov 2023

The South African Reserve Bank (SARB) decided to keep interest rates on hold last week, and South Africans should expect cuts from next year.

Prior to the SARB’s decision, annual headline consumer inflation rose from 5.4% in September to 5.9% in October, claiming for the third month in a row.

The main reason for the increase was higher food (8.7%), fuel inflation (11.2%) and housing utilities (5.4%).

Consumer prices rose by 0.9% in October after the cost of the milk and eggs category (2.5%) grew due to the bird flu outbreak.

Despite the higher inflation reading, the SARB’s Monetary Policy Committee (MPC) kept the repo rate steady at 8.25%.

“Importantly, the decision to pause was unanimous, unlike at the previous two meetings (when votes were split between a pause and a 25 bps increase),” the Bureau for Economic Research (BER) said.

“Underpinning the decision was SARB’s expectation that consumer inflation is set to moderate (despite the recent deceleration) and the MPC’s view that the policy rate is currently already restrictive.”

“The MPC, however, emphasised that risks to inflation remain tilted to the upside.”

Where next

The Nedbank Group Economic Unit said that the unanimous decision to keep interest rates unchanged while maintaining a hawkish tone was unsurprising, with central banks across the globe doing similar.

It added that the SARB has finished its hiking cycle as the October inflation number is unlikely to kickstart an upward trend in inflation.

The pressure on food inflation should decline as the poultry sector situation starts to improve, whilst the domestic fuel price starts to improve amidst a firmed rand and lower global oil prices.

“Although the risks to inflation remain on the upside, we expect inflation to ease toward the target’s midpoint in the first half of 2024,” it said.

“Consequently, we forecast the first cut in March 2024, with four reductions taking the repo rate to 7.25% at the end of 2024.”

Kim Silberman, Economist at Matrix Fund Managers, also said interest rates are restrictive enough to move inflation to the SARB’s target of 4.5%.

“We expect that the SARB will start to cut rates in line with the US Federal Reserve Bank (Fed) in the first half of 2024. We doubt cuts will materialise ahead of the Fed, as this may negatively impact the value of the USD/ZAR,” Silberman said.

“The governor explained that SA is forced to keep rates restrictive because of sovereign risks emanating from high levels of public debt, energy supply issues, high administrative prices and public sector wage inflation, which is not in line with productivity.”

“If these factors were resolved, rates could be structurally lower relative to inflation.”

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