Long wait for any interest rate joy in South Africa

 ·24 May 2024

The South African Reserve Bank (SARB) is widely expected to hold interest rates again next week, with the forecasts for the start of the cutting cycle getting pushed back even further.

Various economists and analysts expect the Monetary Policy Committee (MPC) to stick with rates at 8.25% when it meets next Thursday (30 May), with inflation in South Africa and much of the rest of the world proving sticky.

Inflation figures from Stats SA on Wednesday (22 May) showed a surprise cooling to 5.2%, where the market was pricing in a flat 5.3% or even a small hike.

However, this is likely not enough to convince the Reserve Bank that inflation is under control and sustainably tracking to the mid-point of its target range at 4.5%. The bank has repeatedly stated that interest rate cuts won’t come until it is satisfied the battle against inflation has been won.

This is a prevailing theme across many other major central banks, including the US Fed.

Minutes from the Fed’s committee meeting in April /May showed that. while US policymakers broadly expect inflation to return to target over the medium term, confidence has been dented by recent upturns in CPI.

According to economists at Nedbank, this signals that disinflation would likely take longer than previously anticipated. Some analysts even suggest a further tightening of policy should inflation dynamics remain unfavourable.

“Markets have largely priced in a September cut by the Fed, but it is clear from the minutes and recent comments from officials that interest rates could remain at current levels beyond September 2024,” Nedbank said.

While there is nothing strictly tying the SARB’s moves to that of the US Fed, given the impact on the local currency of States-side decisions, the Reserve Bank tends to lag on its policy moves – which means that South Africa’s interest rate cuts may only come a meeting or two behind.

This would put a start to the cutting cycle sometime in early 2025 – something which investors and fund managers have already considered a possibility.

However, Nedbank said that expects conditions will “gradually become more supportive of monetary policy easing over the next four to five months”.

Consequently, the group expects the first 25 basis point (bps) cut in September, followed by another of the same margin in November.

“The repo rate is forecast to end the year at 7.75%, taking the prime lending rate to 11.25%. Real interest rates will increase further, stabilising above 2% as inflation dips below 5% later this year and throughout next year,” it said.

According to Investec chief economist Annabel Bishop, the bank has a slightly less optimistic outlook, though it also currently expects the cutting cycle to start in 2024.

Investec sees a hold on rates through September 2024, with a single 25 bps cut on the cards at the (final) November 2024 meeting.

The group forecasts the cutting cycle terminating after a total of 150 basis points dropped, which could end around the middle of 2025 at the July meeting (repo rate at 6.75%).

Investec’s forecast is outlined below:

May 2024Hold8.25%
July 2024Hold8.25%
September 2024Hold8.25%
Novemeber 2024-25 bps8.00%
January 2025-50 bps7.50%
March 2025-25 bps7.25%
May 2025-25 bps7.00%
July 2025-25 bps6.75%
Septmeber 2025Hold6.75%

Read: The number that’s killing South Africa

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