Big shift in interest rate expectations for South Africa in 2024

The SARB’s Monetary Policy Committee (MPC) is widely expected to leave the repo rate unchanged at 8.25% on Thursday (25 January) in line with similar holds by banks like the FOMC in the United States.

However, the expectation for rates to start coming down in the second quarter of the year have now been pushed back even further, with Investec only expecting the first cut of around 25 basis points in the third quarter of the year.

Markets have latched onto a “higher for longer” narrative where most analysts and economists agree that the hike cycle has come to an end – but inflationary pressure is likely to ensure that interest rates will stick around at the current restrictive levels for longer than anticipated.

Expectations around the start of the cutting cycle have changed several times over the last few months, with economists first expecting a cut at the start of 2024, then pushed back to around mid-2024, and now pushed back even further to the end of 2024.

The anxiety is mainly tied to inflation worries, where inclement weather threatens food inflation and geopolitical events – mainly around the Middle East – threaten fuel and transport inflation through disruptions to oil trade.

Reserve Bank governor Lesetja Kganyago has maintained a hawkish tone on rates, making it clear that the central bank will not cut rates until inflation is sustained at lower levels.

“The SARB has conveyed its determination to see CPI inflation reach 4.5%, the mid-point of the inflation target range this year; however, risks to the inflation outcome remain to the upside,” Investec economist Lara Hodes said.

The economist said that CPI inflation is likely to rise to around 5.8% y/y in January – although the longer-term understanding is that inflation will eventually settle to around 4.5% on an annual basis.

CPI inflation is currently forecast to have eased to 5.2% y/y in December from 5.5% y/y logged in November. Stats SA will publish the latest inflation figures on Wednesday.

The petrol price cut of 65c/litre in December will have reduced inflationary pressure from the transport component of the CPI basket (in which fuel prices are calculated). Moreover, another petrol price cut was implemented in January, offering a further reprieve, Hodes said.

Petrol prices are building to break this streak in February, though, with the latest data from the CEF pointing to a hike of around 30 cents per litre for petrol and diesel.

More supportive data is emerging from the produce price index – also being published this week.

Hodes noted that the PPI is currently projected to have decelerated to 4.2% in December, from 4.6% y/y in November, with the contribution from the coke, petroleum, chemical, rubber and plastic products grouping (in which fuel price dynamics are captured) projected to ease on the petrol price decrease and notable diesel price cut implemented December, Hodes said.

The current expectations for the data ahead are having an impact on the rand.

The rand opened the week under strain, trading consistently above R19 to the dollar on Monday as markets took in data for the week ahead.

The local unit started trade in the morning just above R19 to the dollar before spiking as high as R19.19 against the greenback in afternoon trade. The rand is currently at R19.13 to the dollar.

Read: Interest rates in South Africa: higher for longer, says Kganyago