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More interest rate pain for South Africans expected

The South African Reserve Bank (SARB) is expected to cut interest rates in January, but rates are expected to remain unchanged for the rest of the first quarter and possibly the rest of the year.

Investec chief economist Annabel Bishop said South Africa’s interest rate cut cycle is expected to slow this year after two cuts in quick succession at the end of 2024.

South Africans have faced significant financial strain since the Reserve Bank began raising interest rates in 2021.  

Before this, the Reserve Bank had slashed rates to record lows to support households struggling during the Covid-19 pandemic. 

However, as inflation began rising in 2021, the SARB initiated its rate-hiking cycle in November of that year.  

This left many families grappling with the lockdown after-effects and the burden of higher interest rates, escalating inflation, and an increasing cost of living.  

By 2024, the Monetary Policy Committee (MPC) had raised rates by 475 basis points, pushing the repo rate to 8.25% and the prime lending rate to 11.75% – both 15-year highs.

This sharp increase hit South African households hard, particularly homeowners, who saw their monthly home loan repayments skyrocket.

The final rate hike in this cycle came in May 2024. Despite mounting calls from citizens and experts to reduce rates and provide relief, the SARB held rates steady for several months.

In September 2024, with inflation easing significantly within the target range, the SARB responded by cutting rates for the first time in years. 

The MPC announced a 25-basis-point cut in September, followed by another 25-basis-point reduction at its November meeting.

Now, the MPC will meet again on 30 January to decide the fate of South Africa’s interest rates.

The SARB is expected to cut interest rates in January, but further cuts in 2025 will depend on inflation and global financial conditions.

Experts widely expect the committee to continue its cutting cycle and decrease rates by 25 basis points at the January meeting. This would bring the repo rate to 7.50% and the prime lending rate to 11%.

Bishop explained that inflation in South Africa has fallen below the SARB’s 3% to 6% inflation target range, dropping to 2.8% in October and rising only slightly to 2.9% in November.

December’s inflation outcome is also expected to be close to 3.0%.

Bishop expects inflation to average 3.5% in 2025 and 4.6% in 2026, while the SARB will continue to target the midpoint of its range, 4.5%.

However, despite this positive outlook for inflation, Bishop warned that South Africa’s Forward Rate Agreement curve has only priced in around one 25-point cut in the repo rate this quarter.

Bishop’s expectations align with market expectations, with seemingly one interest rate cut expected for this year.

Marek Drimal, a strategist at Societe Generale in London, said in a note to clients that the Reserve Bank may even delay the cut until March due to less favourable market and external financial conditions.

Bloomberg reported that Drimal and the market’s view is contrary to what most economists expect for this year. 

They foresee two 25-basis-point cuts in the first three months of the year and another by the third quarter.

This would bring the MPC’s total cuts since starting its easing cycle in September to 125 basis points.

Governor Lesetja Kganyago has repeatedly said the MPC will proceed with caution on rates as the outlook remains uncertain, even as its modelling signals further cuts on the horizon.

Bishop explained that lower expectations for cuts in 2025 are largely driven by a change in projections for rate cuts in the US this year.

“Fewer interest rate cuts than have been expected are a risk for South Africa, although this will remain dependent on the domestic inflation outlook,” she said.

“Expectations for interest rate cuts in the US have moderated, from three 25 basis point drops to one definite 25 basis point drop, and currently just under 70% chance of a second for this year.”

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