Good news for interest rates in South Africa

The South African Reserve Bank (SARB) has elected to hold rates for another two months, but a minority vote for a cut points to rates coming down sooner rather than later.

SARB governor Lesetja Kganyago announced the monetary policy committee’s (MPC’s) decision on Thursday (18 July), with the central bank voting to hold rates at 8.25%.

The vote was not unanimous, with four members of the committee voting for the hold and two voting for a cut of 25 basis points.

According to economists at Nedbank, the decision was widely anticipated, given the slow pace of disinflation and uncertainties surrounding the global inflation and interest rate outlooks.

“The MPC’s tone appeared slightly more hawkish, with some MPC members stating that restrictive policy remains appropriate to stabilise inflation at 4.5%. The change in the Committee’s risk assessment for inflation from balanced to renewed upside provides further evidence of the more cautious tone,” the bank said.

However, the group noted that this assessment seems “somewhat disconnected” from the SARB’s forecasts, which suggest lower headline inflation and tame core inflation.

“We maintain that the critical upside risks highlighted by the SARB at its May meeting have eased slightly. The rand held up better than expected during elections, and the uncertainty that prevailed post-elections has largely dissipated,” it said.

At the same time, the messaging from the US Fed and other major central banks has been slightly more dovish, which bodes well for global risk appetite.

Nedbank said its forecasts are for inflation to continue easing, averaging 5.1% in 2024 and dropping to 4.6% in 2025.

This means that its forecast remains that the SARB will make its first 25 basis point cut to interest rates at its next meeting in September, followed by another cut at its final meeting for the year in November.

This would take the repo rate to 7.75% and the prime lending rate to 11.25% by the end of 2024, it said.

Economists at the Bureau for Economic Research (BER) also see the minority dissenting vote as a sign that the tone is shifting.

The group said that looking ahead, with an improved inflation profile and inflation expectations drifting lower, “we think that the SARB could have the scope to start a shallow-cutting cycle later in September”.

Even the more bearish economists have switched to a most optimistic view.

Ahead of the MPC announcement, Bank of America (BofA) economist Tatonga Rusike noted that any minority voting for a cut would increase the likelihood of a rate cut in September. Which is exactly what transpired.

However, Rusike said that a rate cut in September would still depend on several factors, such as:

• Improvements in the near-term domestic inflation prints (CPI below 5%);
• A further drop in inflation expectations;
• The rand remaining around R18 to the dollar;
• A Fed cut materialising in September.

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.

Read: The R70,000 cost of high interest rates in South Africa