Interest rate relief for South Africa is coming
South Africa could see interest rates drop in September as inflation starts to moderate.
According to Stats SA, annual consumer price inflation was 5.2% in May, unchanged from April.
Annual rates for a third of the product groups, including food and non-alcoholic beverages (NAB), remained stable between April and May.
Although increases were recorded for transport, alcoholic beverages and tobacco, and recreation and culture, inflation was softer for miscellaneous goods and services, communication, clothing and footwear, health, and restaurants and hotels.
“We should see headline inflation continue its plateau in June. Monthly pressure should remain subdued, as higher core inflation, supported by new data on housing price pressures, is mitigated by fuel deflation,” said Koketso Mano, FNB Senior Economist.
“Food pressures should intensify in 2H24 as the impact of adverse weather conditions and higher soft commodity prices reaches retail shelves. In addition, utility inflation should also compound inflationary pressures.”
“Nevertheless, slowing global inflation, softer oil prices, a less depreciated rand, and subdued domestic demand should support slowing inflation going into 2025.”
FNB thus expects headline inflation to average just above 5% this year.
Interest rates
Sanisha Packirisamy, Economist at Momentum Investments, said that the South African Reserve Bank (SARB) will likely keep interest rates unchanged when the Monetary Policy Committee (MPC) meets in July 2024.
However, Packirisamy believes there will be a possible interest rate cut in September 2024.
“Factors influencing our projection include the likely moderation in inflation expectations, the expected moderation in headline inflation, ongoing rand strength, a faster-than-anticipated moderation in food inflation, relatively stable international oil prices and interest rate easing by some major global central banks,” she said.
“Risks to our forecast include the sustainability of rand strength, international oil prices given geopolitical risks and delayed interest rate cuts from the United States (US) Federal Reserve (Fed).”
As reported by Bloomberg, options trading also shows that investors are confident of a cut in the near future, with roughly 20% of investors factoring in a 25 basis point rate cut in the SARB’s July meeting.
There is also a 100% conviction of a 25 basis point cut in November, with over a 70% chance of a 50 basis point cut.
“We expect SARB to deliver 50 basis points worth of cut this year followed by another 50 basis points in the next year, amid falling inflation and better risk sentiment toward ZAR and South African assets,” said Marek Raczko, a strategist at Barclays.
Nedbank economists are also optimistic about a September start to the cutting cycle, pencilling in a 25 basis point cut in that month’s meeting, followed by another 25 bp cut in November.
Investec chief economist Annabel Bishop said the group anticipates a November start to the cutting cycle.
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