Interest rate pain in South Africa sticking around
The South African Reserve Bank (SARB) is widely expected to keep interest rates on hold this week.
According to Bank of America (BofA) economist Tatonga Rusike, the SARB’s monetary policy committee (MPC) is likely to unanimously keep the repo rate unchanged at 8.25% when it meets on Thursday, 18 July 2024.
However, any minority voting for a cut would increase the likelihood of a rate cut in September.
Rusike said that a rate cut in September would depend on several factors, such as improvements in the near-term domestic inflation prints (CPI below 5%), a further drop in inflation expectations and the rand remaining around R18/$ and a Fed cut materialising in September.
A softer US CPI means that an early Fed cut could take place.
In June, the US CPI dropped softer than expected due to soft shelter inflation – the second straight month that CPI inflation was below expectations.
The year-on-year US CPI is now 3%, and the Fed believes that inflation is returning to its target of 2%.
“That background increases the likelihood of Fed cutting in September. Our US economists are emphasising that Fed cuts are not just about inflation anymore as the Fed is also concerned about the economy,” said Rusike.
“While our forecasts for the first Fed cut remains December, we acknowledge the higher likelihood of earlier Fed cuts- likely September.”
If the Fed starts cutting as early as September, BofA sees the SARB cutting in both the September and November MPC meetings.
“The central bank is getting more comfortable with the direction of domestic inflation and likely to see sub 5% prints at the end of 3Q and most of 4Q as likely positive signals of getting close to 4.5% targets.”
That said, BofA still expected the first cut in January 2025 because it had pencilled in the first Fed cut for December 2024.
BofA expects a cumulative 100 bps of cuts (25 bps) in January, March, May, and July.
“We see the cutting cycle as shallow (100bp) with a terminal rate of 7.25% by mid-2025.”
“We forecast inflation to average 5% in 2024, 4.7% in 2025 and 2026. September and October headline CPI prints are set to benefit from base effects, with CPI prints largely close to the 4.5% target of the SARB.”
Investec Economist Lara Hodes also expects the MPC to keep the repo rate at 8.25%.
“We continue to pencil in a start to the easing cycle in November, although the risk is that the South Africa interest rate cutting cycle only begins in 2025,” said Hodes.
“The next FOMC meeting on the 31st of this month should give us a clearer view of when the Fed is likely to begin cutting rates.”
Despite also expecting the MPC to hold later this week, Nedbank’s economists and the Bureau for Economic Research (BER) expect the MPC to cut as early as September.
Group | July Meeting | First Cut |
---|---|---|
Nedbank | Hold | September 2024 |
BER | Hold | September 2024 |
Investec | Hold | November 2024 |
Bank of America | Hold | January 2025 |