Reserve Bank interest rate pause welcomed – but possibly not the end

Lesetja Kganyago

The South African Reserve Bank’s (SARB) Monetary Policy Committee paused interest rate hikes at its 20 July meeting. This decision kept the repo rate at 8.25% and the prime lending rate at 11.75%.

While this decision was largely seen as a welcome reprieve for consumers, the SARB warned that this is not necessarily the end of its hiking cycle.

“At the current repurchase rate level, policy is restrictive, consistent with elevated inflation expectations and the inflation outlook,” said SARB Governor Lesetja Kganyago.

“Serious upside risks to the inflation outlook remain. In light of these risks, the Committee remains vigilant, and decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook.”

The MPC’s decision at this meeting was made following June’s inflation data. It showed a significant cooling in annual consumer price inflation (CPI) and its main drivers, including food and fuel.

In June, annual CPI fell within the SARB’s target range of 3% to 6% for the first time in 14 months, coming in at 5.4% – the lowest since October 2021.

However, the SARB said this good news may be shortlived, as inflation risks remain skewed to the upside.

Experts agree that this pause will be a welcome relief for many South African consumers, but the country must prepare for the possibility of another hike – and rate cuts are still not close.

Kim Silberman – Matrix Fund Managers economist and macro strategist

Matrix Fund Managers economist and macro strategist Kim Silberman said the SARB also lowered its CPI forecast for the second half of 2023 from 5.7% on average to 5.4% and from 5.4% to 5.1% in the first half of 2024.

She said that, since November 2021, the policy rate has been raised by 475 basis points, with the SARB hiking at each of the past 10 meetings. 

“It is prudent at this point to take a break from hiking to assess the cumulative effects on inflation,” she said.

According to the SARB’s projections, if rates remain on hold, the real repo rate will rise to 3.25% by mid-2024, which would be extremely restrictive from a growth perspective.

“Consequently, we think this will be the end of the hiking cycle. We expect that while global financial conditions remain tight, SA may be forced to keep real rates near these levels, but as the global recession brings developed market rates lower, the SARB can consider rate cuts.”

Frank Blackmore – KPMG lead economist 

Frank Blackmore

KPMG lead economist Frank Blackmore said that, although the risks remain to the upside, those risks include a decrease in export prices of the country’s commodities. 

“This may lead to a current account deficit that’s forecast for the year,” he said. 

“The El Nino situation and its impact on agriculture, the lower tax revenues collection, and above inflationary increases in wages that keep interest rates elevated, as well as the rent remaining volatile – all these are risks to the upside for inflation.” 

However, he said the most recent inflation read from June showed that the monetary policy was restrictive enough to reduce inflation to 5.4%, and this is expected to continue over the rest of the year.  

Brina Biggs – 1Life Insurance senior manager

1Life Insurance senior manager Brina Briggs said the MPCs decision means South Africans can now “breathe a sigh of relief” as it allows those that are struggling a sense of reprieve that their debt is not going up this month. 

“This, however, is probably not the end of the interest rate hiking cycle, which is still only expected early next year,” she said.

“Yet, we must remember that while inflation is at a 20-month low, the reality is that any increase here will mean more pressure on consumers down the line.”

“We need to consider load-shedding and inflationary factors such as CPI and retail sales amongst many that can cause changes to the outlook.” 

Arthur Kamp – Sanlam Investments chief economist

Sanlam Investments chief economist Arthur Kamp said the MPC’s decision was split between its five members, and it is unclear whether this is the top of the interest rate hiking cycle.

He said the Reserve Bank is “leaving the door ajar should it need to hike again”, and a lot will depend on the future inflation trajectory. 

Kamp highlighted several inflation risks also mentioned by the Governor, including adverse weather conditions and potential currency weakness.

However, he said another notable risk arises if South Africa battles to attract foreign capital due to constrained prospects for returns on investment given a subdued growth environment.

“Indeed, the Reserve Bank’s forecast of a widening current account deficit to -2.9% of GDP and -3.3% of GDP in 2024 and 2025 respectively from -1.9% in 2023, implies the trend in net foreign capital inflows will need to lift appreciably from its current level to fund the deficit.”

Kamp said it is also important to note the Reserve Bank’s more explicit treatment of government finance in its Quarterly Projection Model (QPM). 

“Suffice to say that should the government debt ratio continue unabated along an upward path it would complicate the Bank’s task, since too loose fiscal policy sustained for too long would be viewed as a risk for the inflation outlook.”

Therefore, it could prompt the Reserve Bank to take a more restrictive monetary policy stance than would have been the case otherwise.

However, he said that based on the current inflation forecast, there seems to be enough reason to believe that we have seen the peak of the interest rate hiking cycle. 

“Arguably, in the current environment of virtually no real GDP growth and soft real credit extension, it is probably better to guide inflation back towards the inflation target over a longer period than usual, as opposed to risking excessive damage to the economy by trying to reach the target quickly.”

In addition, even if this turns out to be the top of the interest rate hiking cycle, it is likely to be quite some time before the Reserve Bank considers cutting its policy interest rate. 

Herschel Jawitz – Jawitz Properties CEO 

Herschel Jawitz
Image credit: Howard Sackstein

Jawitz Properties CEO Herschel Jawitz said the MPC’s decision will be especially important for homeowners with a home loan who have seen their monthly repayments going up by as much as 40% since the rate hike cycle started. 

“While there will not be immediate relief, at least the repayments will stay the same for now,” he said.

“I don’t expect property prices or demand to suddenly move upwards in a noticeable way for at least the remainder of 2023, and the market will remain a buyer’s market in most parts of the country.”

“The hold on rates will be good for sentiment, which is important given the long-term nature of the residential market. If sentiment improves, demand improves – and that’s good for property prices.”

Jatin Kasan – Mazars Audit Partner in Financial Services

Mazars Audit Partner in Financial Services Jatin Kasan said the MPC took a carefully considered stance by keeping interest rates unchanged. 

However, he said the economy is still under strain, as the heightened cost of debt has reduced the amount of residual income available for investment or measures to stimulate growth. 

“We are still seeing an increasing number of actions to refinance debt at such rates, resulting in a considerable number of businesses focusing on aggressive cost-cutting measures,” he said.

“The unchanged interest rate also provides expected credit loss models with some short-term macro-economic certainty when estimating credit loss provisions. However, caution is needed as rates may prove to be volatile in the future.”

Kasan said the MPC’s decision to hold the interest rate steady could be a sign that the rate curve has peaked, and if future inflation data is positive, a medium-term decrease is likely.

“Furthermore, if interest rates continue to hold or even decrease, this could protect the value of the currency and so improve the chances of balanced and sustainable economic growth.”


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