What the GNU means for interest rates in South Africa

While the new Government of National Unity (GNU) and formation of a multi-party cabinet has eased market anxiety and taken some risk out of the picture, it hasn’t shifted the dial too much on the inflation, GDP and interest rate outlook.

South African central bank Governor Lesetja Kganyago welcomed the reappointment of Finance Minister Enoch Godongwana in the new coalition cabinet unveiled by the president this week.

“We still have the same minister of finance that we have been talking to, who has always been providing guidance and leadership on macroeconomic policy and that gives us comfort,” Kganyago said in an interview on Tuesday with Bloomberg TV at the European Central Bank Forum in Portugal.

The formation of the so-called government of national unity also provides reassurance to investors who had been concerned about what type of coalition would be formed in the wake of elections in May, he said.

The African National Congress, which had governed South Africa for three decades since the end of apartheid in 1994, lost its parliamentary majority for the first time in the May 29 vote.

That forced the party to form a coalition government with rivals, including the centrist Democratic Alliance and other smaller parties.

“The constitution of the Government of National Unity became positive because there was a concern in the market about what kind of coalition would emerge,” Kganyago said.

The South African Reserve Bank has kept interest rates at 8.25% at each of its three monetary policy committee meetings so far this year amid uncertainty before the elections, which opinion polls showed being tightly contested.

The coalition has been cheered by investors who reckon the presence of opposition parties will help the new administration accelerate economic reforms, tackle poor state governance, and stoke investment and employment.

The governor also said that while there continue to be risks to the bank’s outlook for price stability — including geopolitics, the impact of the El Nino weather phenomenon on food costs, and oil prices — the central bank is maintaining its outlook that inflation will return to the midpoint of its 3% to 6% target range by the first half of 2025.

It’s been above 4.5% for more than three years, and the central bank expects inflation to average 5.1% this year.

“Policy is still very much focused on price stability, and we actually expect that we will be back within target in the first half of 2025,” Kganyago said. “We are more confident now that we are getting back to target.”

According to Investec chief economist Annabel Bishop, while the announcement of the new cabinet and the wider Government of National Unity has brought some positive sentiment to the market, it is not expected to significantly impact the growth outlook.

The outcome of the election—a month later—is not expected to alter the path of strengthening economic growth, which Investec expects to still be quite modest, but accelerating over a five year period.

“The appointment of the ministers and other executive positions of government has seen the ANC retain the key positions for the economy. The business-government collaboration will remain in place, strengthening factors of production,” Bishop said.

The economist still forecasts economic growth of 1.0%, slightly down from 1.1% previously as revisions to historical data and a poor first quarter have influenced the figure.

“But we continue to forecast growth approaching 3.0% by 2029,” she said.

On the interest rate front, Bishop said that any data supporting a cut in the US will boost local indicators like the rand, and will also strengthen the view of a 2024 cut to interest rates.

However, Investec is of the view that the earliest this could be is November, with another likely scenario being that this is pushed back to 2025.

“In South Africa, November is the earliest month that a cut in the repo rate is expected to occur. However, the Monetary Policy Committee (MPC) could easily deliver its first interest rate cut only in 2025 instead, as its tone has not softened in this regard,” Bishop said.

Other economists have been more optimistic, pointing to a potential cut in September (and again in November), while some are quite pessimistic, saying that a cut in 2024 is unlikely.

Bank of America (BofA) economist Tatonga Rusike projects that the US Federal Reserve will not cut rates in 2024 following June’s Federal Open Market Committee (FOMC) meeting, pushing its first rate cut call from the USA out from September 2024 into January 2025.

In Rusike’s view, it is unlikely that the SARB would cut before the US Fed.

“We now assume cuts of 25bp each will start from January 2025, with a cumulative 100bp in January, March, May and July.”

(With Bloomberg)

Read: Kick in the teeth for interest rate cuts in South Africa