Warning for interest rates in South Africa

 ·28 Jan 2024

Interest rates are expected to decline in 2024, but the potential new makeup of the South African Reserve Bank’s (SARB’s) future Monetary Policy Committee (MPC) may mean that inflation is seen as more of a priority than economic growth.

In its last meeting, the SARB’s Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 8.25%, in line with market expectations.

This came after inflation stayed within the SARB’s inflation target band of 3% to 6%, easing to 5.1% in December from 5.5% in November and 5.9% in October.

Although economists do not expect any more interest rate increases in this current cycle, there is a large risk to the broader interest rate outlook, with the SARB expected to appoint new hawkish members to the MPC.

A hawk aims to keep interest rates higher to reduce inflation. On the other hand, a dove seeks to keep interest rates low to allow for economic growth and increase employment.

Reserve Bank Governor Lesetja Kganyago is seen as a hawk, while recently departed Deputy Governor Kuben Naidoo was seen as a dove.

Speaking with the Sunday Times, Economist Dawie Roodt said that Kganyago will likely be part of appointing new MPC members, and he will try to get more people who think as he does.

The search could possibly go beyond simply finding a replacement for Naidoo, with Kganyago noting that there can be eight members of the MPC.

David Fowkes, who previously worked in the Bank’s financial markets department, is now a member of the MPC.

Once Naidoo’s replacement has been appointed, the MPC will have six members.

Kganyago said that the Bank will search for another person to sit on the committee so that there are seven committee members.

The Governor said that it is better to have an odd number on the committee so that he does not have to exercise “two votes”, as his vote in a tie would be the decider.

Looking ahead

In the short term, economists expect that interest rates will be cut in either May or July this year.

Economists at Nedbank said that MPC will maintain a hawkish tone until inflation eases 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.”

The group expects the SARB to cut interest rates by 25 bps points in May, with a cumulative 100 bps worth of cuts across 2024

However, the first cut may be delayed to July if the rand drops ahead of the South African national elections, the USA cuts its interest rates later than expected and/or geopolitical tensions see further escalation.

Bank of America (BofA) also said that a tough Q2 will make it hard for the SARB to cut interest rates in May, with the first cut likely in July.

Although BofA expects 125 bps worth of cuts between 2024 and 2025, this will be incredibly shallow compared to the 475 bps worth of cuts since November 2021.

Read: SARS is coming after these taxpayers in 2024

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