Reserve Bank to cut interest rates in 2024 – but don’t expect too much relief

PwC expects the South African Reserve Bank (SARB) to cut interest rates in mid-2024 but warned that South Africa will not see the repo rate cut as deeply as during the Covid-19 pandemic.

The SARB’s Monetary Policy Committee (MPC) will meet this week and announce its monetary policy decisions on Thursday, 23 November.

PwC said the exchange rate, industrial production and international monetary policy factors all point to local policymakers not needing to increase the repo rate further.

At their last meeting in September, three MPC members voted to keep the repo rate at 8.25%, while the other two favoured an increase to 8.50%. 

The repo rate was eventually left unchanged based on the macroeconomic circumstances at the time and the SARB’s medium-term economic forecasts generated by the SARB.

However, following the September meeting, many economists believed the MPC would lift the repo rate by around 25 basis points in November. 

The SARB also noted in September that risks to the inflation outlook were to the upside, and many signs pointed to more upward pressure on consumer price inflation.

However, over the past few weeks, developments and data releases have eased concern about inflation in the short term. The outlook for economic growth has also deteriorated.

Firstly, from a financial markets perspective, the rand has strengthened against major currencies since the last MPC meeting. 

The South African currency ended September near R19.50 against the US dollar and has subsequently appreciated to trade below R18.70/USD over the past two weeks.

PwC said this is positive news when considering the cost of imported goods like fuel and food. 

The oil price has also softened, with Brent crude now trading below $78/bbl compared to above $82/bbl at the start of November. 

Therefore, local fuel prices are expected to decline again in December, following this month’s downward adjustments.

“The stronger rand will reduce the cost of imported goods. Imported inflation was only 1.4% y-o-y in August and 2.8% y-o-y when excluding fuel products,” said PwC South Africa chief economist Lullu Krugel.

“A favourable exchange rate position will further ease pressure on the cost of the country’s import basket heading towards the end of 2023.”

“Imported inflation contributes directly to headline consumer price inflation through goods that are sourced internationally, including fuel, appliances and motor vehicles, to name a few.”

Secondly, from a macroeconomic perspective, the most recent manufacturing and mining production data from Statistics South Africa sent disappointing signals about the outlook for economic growth in the third quarter, PwC said.

Manufacturing output slumped by 4.3% year-on-year in September, while mining production was down 1.9% year-on-year. 

While lower international commodity prices and pressure on global demand were influential, local challenges like load-shedding and constrained rail services contributed to this weak industrial sector performance.

PwC South Africa senior economist Christie Viljoen said, “While South Africa has received some positive employment data and better-than-expected retail sales numbers over the past week, the overall outlook for the economy remains downbeat following recent disappointing mining and manufacturing production reports.” 

“This industrial data shows that local and international factors are weighing on the value and volume of factory goods produced and minerals extracted.”

He said this could result in the SARB lowering its economic growth expectations for 2023 and 2024.

Thirdly, cooling inflation in the US will likely result in the Federal Reserve holding off on further interest rate hikes in the near term before easing monetary policy in 2024. 

While the SARB does not directly track international lending rates in its policy decisions, the South African interest rate premium over advanced economies is an important aspect in the valuation of the rand, which, in turn, impacts the nature of imported inflation, PwC explained.

Finally, core inflation has shown favourable trends recently. In September, core inflation – a less erratic inflation measure that excludes the volatile food and fuel prices – declined to 4.5% year-on-year. 

This decline to the midpoint of the inflation target range would have eased concerns about underlying inflation in the minds of MPC members.

“Combined, these four factors point to easing pressure on the local inflation and global interest rate forecast, alongside further pressure on the domestic economic growth outlook.” 

“PwC South Africa’s economists believe that following no change to interest rates in July and September, the SARB MPC will again hold steady in November, with the repo rate peak firmly in place.”

PwC said the next move in interest rates will be down, which should happen around the middle of 2024. 

It said the next round of SARB forecasts will help economists refine their predictions of when interest rates will start coming down and by how much. 

However, it is certain that the SARB will not be cutting the repo rate as deeply as it did during the Covid-19 crisis. 

“At present, we believe the repo rate could ease by a cumulative 150 basis points between mid-2024 and end-2025.”

This would bring the current repo rate of 8.25% down to 6.75%, which is still higher than the pre-Covid rate.