When interest rates will finally be cut in South Africa

 ·26 Jan 2024

The South African Reserve Bank (SARB) is expected to cut interest rates this year, even if there are still questions about when it will start.

Yesterday, 25 January, the SARB’s slightly smaller Monetary Policy Committee (MPC) – following the departure of Deputy Governor Kuben Naidoo – kept the repo rate unchanged at 8.25%.

The markets widely anticipated this as inflation has been regularly within the SARB’s target range of 3% and 6%, with the CPI print for December 2023 at 5.1%.

Economists at Nedbank, however, warned that the MPC will maintain a hawkish tone until inflation edges closer to the preferred target of 4.5%.

“While many of the upside risks to the inflation outlook have dissipated since last year, those emanating from a vulnerable rand and rising geopolitical tensions will drive the SARB to adopt a ‘wait and see’ approach before commencing its cutting cycle,” Nedbank said.

“Demand-side pressures have continued to ease with consumer spending shrinking, credit growth slowing, and defaults remaining elevated. As domestic demand weakens further and global disinflation intensifies, headline inflation should decelerate more convincingly towards 4.5%.”

“In essence, the global slowdown in demand will contain the upside price pressures, but the risk to our forecast does remain tilted to the upside.”

Thus, the group’s base expected the SARB to cut interest rates by a cumulative 100 bps across 2024, with a 25 bps cut during the May meeting.

That said, the SARB could delay the first cut to July if the rand drops ahead of the elections, the USA eases its monetary policy later than expected and geopolitical tensions escalate further. If these events occur, the SARB is expected to cut interest rates by 75 basis points annually.

FNB Chief Economist Mamello Matikinca-Ngwenya said that the market’s consensus of a cut in Q2 2024 is slightly optimistic given the upcoming elections and worsening risk sentiment as well as exchange rate pressure associated with this.

“Therefore, our view is that the first cut could be in the 2H24. That said, the MPC still requires more evidence that inflation will anchor at the 4.5% target within the policy horizon,” Mamello Matikinca-Ngwenya said.

“Unfortunately, heightened geopolitical tensions, biosecurity as well as adverse weather patterns complicate the disinflation trend and could prolong the lift in inflation expectations away from the target.”

“This supports the broad expectation that the cutting cycle will be shallow and real interest rates should remain higher than the pre-pandemic period.”

Not what it used to be

Bank of America also expects that the turbulent Q2 will make it challenging for the SARB to start cutting in May, with cuts probably coming in July.

During a media briefing earlier this week, Bank of America said that it expects 125 bps worth of cuts between 2024 and 2025.

However, this decrease will be incredibly shallow compared to the 475 basis points worth of increases since November 2021.

Although consumers will welcome interest rate declines, they should not expect borrowing costs to reach the same levels that they were at during Covid-19.

Read: Expect a shift for the rand in 2024 – but with a catch

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