SA Reserve Bank could end interest rate hikes in July

Lesetja Kganyago

Since November 2021, the South African Reserve Bank (SARB) has been stuck in a hiking cycle. Some experts believe it could come to a pause at the next Monetary Policy Committee (MPC) meeting in July.

Since the hiking cycle started, the SARB has implemented ten consecutive interest rate hikes, pushing the repo rate to 8.25%.

A cumulative 475 basis points of hikes have been implemented in an attempt to bring the country’s high inflation within the SARB’s target range of 3% to 6%, and anchoring it around the 4.5% midpoint.

However, South Africa’s inflation has been sticky and remained well above the upper end of the target for months.

Largely fueled by high food and fuel prices, the country’s inflation kept rising. However, April’s consumer price inflation (CPI) data showed the first sign of hope for relief when it came in at 6.8% – down from 7.1% in March.

This downward trend continued in May’s inflation data, which recorded CPI at 6.3% – slightly below expert predictions.

The US Federal Reserve – which has also been in a hiking cycle and implemented ten consecutive rate hikes – recently decided to pause interest rate hikes.

This, in combination with the cooling inflation rate, makes some experts believe that South Africa could also see a pause in hikes at the upcoming MPC meeting in July.

Raymond Parsons – North-West University Business School economist

North-West University Business School economist Raymond Parsons said May’s CPI data was “welcome but not unexpected good news”.

“Although food costs remain high, the overall downward trend in headline inflation is converging on earlier consensus expectations of South Africa getting closer to the goal of price stability in the months ahead,” he said. 

“Core inflation, however, remains stubborn for now.”

According to Parsons, the inflation outlook must also be seen in conjunction with the SARB’s latest leading business cycle indicator, which declined further in April. 

On an annual basis, this leading business cycle indicator fell by 9.1% year-on-year. Other recent high-frequency economic data also strongly reinforce the expectations of much weaker business conditions prevailing in the second half of 2023, with downside risks.

Forecasts for economic growth in 2023, therefore, hover between only 0.1% and 0.3%. 

Parsons said the present crosscurrents in the economy suggest that the SARB should “take a leaf out of the US Federal Reserve’s book” and consider pausing further interest rate hikes at its July meeting. 

He said there are time lags between monetary policy decisions and their effects on the real economy that need to be weighed. 

“It is now necessary for the SARB to also assess what the cumulative impact of its rate hikes since November 2021 has had on the economy,” he said.

Annabel Bishop – Investec chief economist

Investec chief economist Annabel Bishop

Investec chief economist Annabel Bishop told eNCA that the market expected May’s CPI to come in at 6.5%. The 6.3% was, therefore, a very positive outcome.

She said the inflation data supported Investec’s expectation that the SARB will not hike rates again this year. This is because the Reserve Bank’s goal of anchoring inflation around the midpoint of its target range will likely be achieved next year.

She said May’s inflation outcome was very subdued, and there was very little pushing prices up, as there was only a 0.2% increase. Food inflation was down, and fuel prices did not apply too much pressure.

She said the subdued outcome shows that the SARB’s interest rate hikes worked and that it would be appropriate for them to pause the hiking cycle now.

However, she noted that one of the reasons inflation came down was due to the high base effects seen a year ago when food prices were rapidly rising.

Absa research team

Absa said May’s headline CPI is the lowest level the country has seen in 13 months. 

It attributed the slowdown to a sharper-than-expected decline in food and non-alcoholic beverages inflation to 11.8% year-on-year in May from 13.9% in April, which effectively shaved 0.4 percentage points off headline inflation. 

Absa expects headline CPI to ease into the target range, reaching 5.5% in June and ending the year at 4.9%. 

“Moreover, we see the May CPI data as consistent with our expectation that the SARB will keep the repo rate on hold until March next year.”

Johann Els – Old Mutual Investment Group chief economist

Old Mutual Investment Group chief economist Johann Els said the high inflation South Africa has experienced over the past year has largely been fueled by high food inflation which, in turn, has been pushed higher by load-shedding.

However, the country has now reached a point where it can say for certain that food inflation is trending downward, which will also keep headline inflation lower.

Els told SABC that the lower inflation numbers and the expectation of lower food inflation over the next few months could mean that headline CPI can be below 6% by June, below 5% by July and around 4.5% for the rest of the year.

While South Africa likely will not see interest rate cuts anytime soon, this optimistic prediction means it is unlikely that the SARB will hike rates any further in 2023, he said.

However, he said inflation could surprise on the downside, and the SARB’s hawkish stance on interest rate hikes in the past few months could mean that South Africa will see a rate cut before the end of 2023 or at the beginning of 2024.


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