Another blow for interest rate hopefuls in South Africa

After announcing another hold on interest rates last week, the indication from the South African Reserve Bank (SARB) is that relief is still some way off – and the forecasts for 2024 have already been cut.

According to Nedbank’s latest economic monitor, the group’s economists believe that South Africa’s hold on rates will carry on longer than expected, and only 50 basis points will be cut this year when the cycle eventually swings – down from the 75 basis point cuts previously forecast.

“While the SARB’s inflation forecasts have not changed materially, the underlying tone of the Monetary Policy Committee’s statement and the governor’s (Lesetja Kganyago’s) press comments suggest a bias towards keeping interest rates at the current restrictive level for longer,” the group said.

“This shift is also visible in the Quarterly Projection Model’s repo rate projections, which now only recommend cumulative cuts of around 50bps in 2024 compared with 75bps at the previous meeting.”

Nedbank said its forecasts are generally in line with those presented by the SARB – with the bank factoring in the big risks to inflation, including the El Nińo weather event’s impact on food prices and the vulnerable rand.

Argi experts are already warning of the adverse weather conditions and the impact on crops – with double-digit increases expected to hit staples like maize.

Meanwhile, electricity price hikes – in effect from Monday, 1 April 2024 – are also likely to feed through into higher costs for households.

The rand, meanwhile, will likely suffer “jitters” up to and around the 29 May elections, where the outcome and makeup of government after the vote is still uncertain.

“Given these risk factors’ unpredictability, the MPC will likely remain cautious for longer,” Nedbank said.

“Consequently, it now seems more likely that interest rates will remain unchanged deep into Q3, followed by two cuts of 25bps each in September and November. If these cuts materialise, the repo and prime rates end the year at 7.75% and 11.25%, respectively.”

Should these forecasts prove true, South Africa might lag the start of the cutting cycle by major global banks by a few months, with most projections pointing to a mid-year cycle for the US Fed. The Bank of England and European Central Bank are also anticipated to start cutting around June and July.

Experts at Sanlam Invest warned ahead of the latest MPC meeting that South Africa is likely to experience a late cutting cycle in 2024 – and when the cuts come, they will be slow and shallow, dousing any hopes for a rapid descent.

Read: Middle class hanging on by a thread in South Africa – and cutting interest rates won’t help