Boost for interest rate cuts in South Africa
The South African Reserve Bank (SARB) should start cutting interest rates in September, as the country’s inflation outlook is positive.
Stats SA’s latest data showed that the annual headline CPI moderated from 5.2% in May to 5.1% in June—the lowest reading this year.
The decelerations were primarily due to softer price increases in housing & utilities (up 5.5% in June vs 5.8% in May), food & non-alcoholic beverages (4.6% vs 4.7%), and transport (5.5% vs 6.3%).
Core inflation, which excludes volatile food and energy costs, also dropped down to 4.5% in June from 4.6% in May.
In addition, producer price inflation (PPI) remained steady at 4.6% in June.
On a monthly basis, PPI inflation declined by 0.3% – the first decline over the first six months of 2024.
“Looking ahead, we now expect headline CPI to moderate towards the SA Reserve Bank’s (SARB) 4.5% midpoint target by the end of Q3, averaging 4.8% for the year,” said the Bureau for Economic Research (BER).
“This is largely supported by a stronger rand and favourable fuel price dynamics. Similarly, PPI inflation is expected to ease through the second half of the year.”
The BER said that a better inflation profile would allow the SARB to cut the repo rate in September.
Although the BER was already predicting a September cut, other analysts and economists have brought forward their expectations of a rate cut after the latest Monetary Policy Committee (MPC) meeting.
In the July meeting, the MPC voted to keep the repo rate at its 15-year high of 8.25%, in line with market expectations.
However, two of the six MPC members voted for a cut of 25 basis points.
“This represents a departure from last year when the policy rate was kept unchanged with unanimous votes. The monetary policy outlook is getting interesting again,” said Bank of America (BofA).
On top of the moderation in inflation towards the SARB’s target of 4.5%, BofA said that the formation of the Government of National Unity (GNU) has strengthened the rand.
With domestic inflation figures pointing to a cut sooner rather than later, BofA expects the first 25 basis point cut in September.
This is then expected to be followed by cuts in November, January and March – bringing the repo rate to 7.25%.
“We also think the latest SARB forecasts open up the possibility of an outsized cut in September (say 50bp), should the Fed cut then, and a lower terminal rate of potentially 7% as early as 1Q 2025.”
This marked a massive shift in BofA’s thinking, which, before the July MPC meeting, expected the first-rate 25 basis point cut to occur only in January 2025.
Possible risks
However, BofA admitted that the MPC may act cautiously due to concerns about the pace of cuts globally and the potential impact on the rand.
Although markets are pricing in the US Federal Reserve cutting rates in September, BofA’s US economists are not as convinced as the economy is not cooling as yet.
Moreover, Investec Chief Economist Annabel Bishop warned that the rand could weaken if the MPC cuts rates too soon.
The MPC delaying a cut and the US Fed starting to cut would widen the differential between South African and US interest rates, adding to the rand’s strength. However, the inverse is also true, meaning that the SARB will likely likely keep an eye on US developments.
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