‘Door wide open’ for interest rate cuts in South Africa next month

 ·22 Aug 2024

Better-than-expected inflation numbers mean that a cut in interest rates looks certain for September.

Stats SA’s data showed that inflation dropped from 5.1% in June to 4.6% in July, better than the Bloomberg Consensus of 4.8%.

The July inflation print is also the lowest in three years since July 2021, when the rate was also at 4.6%.

The South African Reserve Bank (SARB) started hiking interest rates in late 2021 as inflation rose. The repo rate is currently at a 15-year high of 8.25%.

The latest inflation figure is just 0.1 percentage point above the SARB’s target of 4.5%.

“Economists were surprised by lower contributions from core goods/services, alcohol/tobacco, and water and electricity,” said Ruan Yacumakis, Quantitative Analyst at Prescient Investment Management.

“With global inflation pressures also letting up and US growth coming under pressure, the door is wide open for our first interest-rate cuts in September for both the US and South Africa.”

Investec Chief Economist Annabel Bishop said that as inflation moves closer to the midpoint, the SARB’s Monetary Policy Committee tone will likely soften, even if it remains cautious over the inflation outlook.

Investec also believes that the first interest rate cut of the year will be in September, with the MPC cutting the repo rate by 25 basis points.

With a firmer rand and a fall in fuel prices bringing inflation down faster than expected in July, Bloomberg sees inflation returning to the SARB’s midpoint target of 4.5% in Q3 2024 instead of the previously thought Q4.

Yvonne Mhango, Bloomberg’s Africa Economist, said this would kick start the rate-cutting cycle in September.

Before the better-than-expected July inflation data, several financial institutions and economists, including Nedbank, Bank of America, Standard Bank, and the Bureau for Economic Research, also believed that the Repo rate would be cut.

What it means for South Africa

“For consumers, a potential interest rate cut by the SARB in September could lead to more affordable financing options for purchasing vehicles,” said National Automobile Dealers’ Association Chairperson Brandon Cohen.

“Lower interest rates would reduce monthly instalment costs, making it easier for South Africans to invest in new and used vehicles. This, coupled with lower fuel prices, could significantly enhance the overall affordability of vehicle ownership.”

This would also help the embattled automotive sector, as lower borrowing costs could stimulate demand, encouraging more consumers to purchase vehicles. Businesses relying on fleet vehicles would benefit from reduced operating costs due to lower fuel prices and more favourable financing terms.

Yacumakis added inflation should be well under control in the future, benefitting from tailwinds like the prospect of expedited political reforms in South Africa (which will strengthen the rand), along with lower interest rates and inflation globally. Demand-side pressures on prices are also low.

“South African equities and bonds stand to gain from these developments since global investors aiming to achieve their return targets will need to start considering risky markets (such as South Africa) more seriously in the case of lower interest rates on offer on their doorstep,” said Yacumakis.


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