Big trouble for interest rate cuts in South Africa

 ·17 Apr 2024

South Africa’s better-than-expected inflation figure for March is unlikely to change the South African Reserve Bank’s (SARB’s) hawkish stance on interest rates, market experts say.

Stats SA said that headline inflation dropped from 5.6% in February to 5.3% in March – better than the 5.4% predicted by Bloomberg’s economists.

Although inflation has remained within the 5% to 6% band for the year, it will likely hover at the upper end of the SARB’s 3% to 6% range for the rest of the year, missing the key target of 4.5%.

According to Investec chief economist Annabel Bishop, given the inflationary pressures, the bank has revised its inflation forecast for the year up slightly, to 4.9% y/y from 4.7% y/y previously, given higher supply side pressures.

It does not see CPI inflation dropping to 4.5% y/y before September. This is inline with the International Monetary Fund (IMF), which also expects inflation to average 4.9%, only hitting an average of 4.5% in 2025.

Impact on interest rates

Bartosz Sawicki, market analyst at Fintech Conotoxia, said that persistent price pressures will continue to support the SARB’s hawkish stance, dashing hopes for interest rate cuts in 2024.

Sentiment around interest cuts in South Africa have already shifted, with traders erasing bets on monetary policy easing in South Africa at all this year.

“South Africa is one of the few major emerging market economies that will not see a rate cut before the end of the year,” said Sawicki

“With no rate cuts currently priced in, the rand, which has depreciated almost 4% against the rebounding US dollar in year-to-date terms, will remain under the influence of other factors.”

In the near term, the rand will be driven mainly by domestic politics, with the latest polls showing that the ANC is predicted to fall below 50% in parliament.

If the ANC leans to parties on the far left, it is predicted that the rand will suffer.

“Firstly, uncertainty and potential government instability would translate into higher risk premiums,” said Sawicki.

“Secondly, such an outcome would be perceived as market-unfriendly due to diminishing prospects of much-needed fiscal consolidation.”

“In the next two years, the budget deficit is expected to remain above 5%.”

The rand has been incredibly volatile going into the elections, and soon the R20.0/$ limit may be tested if market sentiment fails to stabilise, Sawicki said.

Conotoxia predicts that the SARB will thus remain hawkish and keep the repo rate at 8.25%.

Looking more positively, the most recent spike in metal prices should improve related terms of trade, which should partially offset the soaring oil prices on the fragile current account situation.

“Nonetheless, Conotoxia sees no real respite for the rand on the cards in 2024. Political uncertainty, infrastructural woes and weak fiscal position should prevent the USD/ZAR rate from a sustainable decline below R19.00/$.”

Positive predictions

Providing a counter view, FNB’s economists expect that interest rate cuts will still come in 2024, even if sentiment is becoming more depressed.

Headline inflation is expected to remain flat at 5.3% in April as core monthly inflation slows as the weight of periodical surveys falls in April.

However, fuel inflation is expected to rise due to a 60c increase in petrol prices that month and should impact broader transport costs.

“While we foresee food inflation softening towards the middle of the year, there is a likelihood that lower yields following hostile weather conditions will revive price pressures,” said Koketso Mano, FNB Senior Economist.

“Furthermore, heightened tensions in the Middle East could weigh on oil supply, posing an upside risk to fuel and logistical costs.”

“The rand is also adversely affected by hawkish monetary policy rhetoric in the US.”

This could keep inflation much stickier than anticipated, which would keep interest rates at current levels for longer, as will expectations for the US Federal Reserve rate cut being pushed back.

“Ultimately, the view that interest rates remain higher than pre-pandemic levels for the foreseeable future remain intact,” said Mano.

Economists at Nedbank also remained on the optimistic side, sticking to its current forecast that the Reserve Bank will cut rates in September and November.

“Today’s sticky inflation outcomes and amplified upside risks stemming from the adverse turn in the global landscape further validate the generally cautious and hawkish undertone adopted by the MPC at the March meeting,” it said.

“Consequently, we do not see much reason to change our interest rate forecast based on today’s inflation numbers.

“We still expect the MPC to hold interest rates unchanged for much of the year, with the first cut of 25 bps forecast for September, followed by another 25-bps reduction in November.”

Read: Critical tax deadline fast approaching – a first for South Africa

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