Perfect storm hitting interest rates in South Africa

 ·11 Apr 2024

Hopes for interest rate relief in South Africa anytime soon are dimming as a perfect storm of adverse conditions, with risks on the upside, in play.

This includes:

  • Higher inflation than expected already recorded in the first months of the year
  • Higher fuel prices adding to inflationary pressures, with more hikes expected
  • Upwards pressure from food prices, with weather conditions adding risks for crops this year
  • The weakening rand against the US dollar
  • Tax pressure kicking in, particularly sin taxes
  • Global central banks pushing rate cuts back

Investec chief economist Annabel Bishop says all of these conditions—and the risk of worse to come—support a delay in the start of South Africa’s interest rate cut cycle.

The tone on interest rate cuts in 2024 has turned quite sharply, with economists and analysts switching from expectations of a start to the cutting cycle around May or July to September or even November.

This is in line with a global shift in sentiment around rates, where markets anticipate a much later start to rate cuts.

The quantum of rate cuts has also changed, with expectations moving from 100 basis points cut in 2024, seen at the start of the year, to 75bp and, most recently, only 50bp.

For South Africa, two main factors are at play with interest rates. The first, and most obvious, is inflation, with the South African Reserve Bank sticking to its guns that it will not cut rates until inflation is under control and sustained at the mid-point of its target range (4.5%).

The second factor is moves by central banks in the US and other markets, where the SARB is unlikely to cut rates ahead of them, as this would weaken the rand.

Inflation woes

Looking at inflation, Bishop noted that South Africa is currently facing inflationary pressure on several fronts, including fuel prices, food prices and taxes.

February saw CPI inflation jump up to 5.6% y/y in South Africa, from 5.3% y/y in January, and 5.1% y/y in December, with inflation remaining above 5.0% y/y since September last year.

Bishop said inflation will likely be above 5.0% y/y yet again in the next print (for March), although lower than February’s number. Despite this, it will likely be viewed unfavourably by the Reserve Bank, she said.

“Higher fuel prices contributed to inflationary pressures from February in South Africa, as international oil prices rose compared to the start of the year, pushed up by expectations of higher demand globally, and some supply constraints,” she said.

March saw another significantly hike in both petrol and diesel prices, which will likely feed through in the inflation figures.

Looking ahead, while April saw a cut of a few cents for diesel, petrol prices were still up—and the latest data from the Central Energy Fund points to a similar mix for May.

Problems cropping up

There has also been upwards pressure from food prices, Bishop said. While international food prices have been easing somewhat, the weak rand has made dollar-based imports more costly.

Adding to these pressures, damaging weather conditions – like very hot and dry conditions – have worked against crops and planting that occurred with good rains at the start of the season. These add further risks looking ahead.

“The moderation in food price inflation to date is expected to reverse, leading to upwards pressure on CPI inflation from this heavily weighted component, although there is a lag between SA’s agricultural food price changes and those in the CPI,” Bishop said.

“The risks to South Africa’s food, and hence CPI price, inflation outlook has risen noticeably. A worsening in the outlook for food crop production also has implications for animal feed. A jump in food price inflation would noticeably push up CPI inflation.”

These pressures will add to the rest of the risks for inflation, the economist said – all of which threaten to delay the start of the interest rate-cutting cycle even further.

“March will also see some pressure from sin tax increases in the budget as the prices of alcohol and tobacco products rose – although there is a slight statistical base effect which will exert some, although not much, downwards pressure,” Bishop said.

“Looking forward, the risks are tilted to the upside for inflation for the year as a whole, from both food and fuel prices for SA. Underlying inflationary pressures have strengthened, all of which support the delay in SA’s interest rate cut cycle.”

Read: Mood shifts for interest rates in South Africa

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