The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) paused interest rate hikes for the third time at its November meeting.
This decision kept the repo rate at 8.25% and the prime lending rate at 11.75%.
While this decision was largely expected and seen as a welcome reprieve for consumers, the SARB warned that this is not necessarily the end of its hiking cycle.
SARB Governor Lesetja Kganyago said risks to the inflation outlook are still assessed to the upside, as oil markets are tight and core inflation remains sticky.
He said serious upside risks to inflation remain, and MPC decisions will continue to be data-dependent.
Since the interest rate hiking cycle started in November 2021, the MPC has hiked the repo rate ten times by a cumulative 425 basis points.
This has brought the repo rate to a 14-year-high of 8.25% as the SARB has attempted to bring South Africa’s high, sticky inflation down and within its target band of 3% to 6%.
Their efforts seem to have borne fruit, as inflation has moderated to within this band and is now close to the mid-point of the target (4.5%), as July’s inflation print showed CPI standing at 4.7%.
At its last two meetings, the MPC paused the hiking cycle, as inflation had fallen and was within the 3% to 6% target range.
However, headline inflation has steadily increased again, rising to 5.4% in September, although it is still within the target.
Despite this upward trend, experts agree that this pause is a welcome relief for many South African consumers, and it is likely that the country has reached the peak of the hiking cycle.
However, they warn that South Africa will likely only see cuts in mid-2024.
Mamello Matikinca-Ngwenya – FNB chief economist
FNB chief economist Mamello Matikinca-Ngwenya said the MPC’s decision came as expected.
“Global activity has weakened following the post-pandemic cyclical recovery, and while inflation remains sticky, it is slowing,” she said.
“In line with this, central banks in major economies have also paused interest rate hiking cycles.”
She said locally, lower fuel prices should support slower headline inflation before year-end, pushing real interest rates higher.
More importantly, core inflation remains weak despite higher import and electricity costs, highlighting constrained consumer demand that has extended to property and vehicles.
“While funding risks remain elevated, the more positive market reaction to the Medium-Term Budget Policy Statement and a subsequently improved rand-dollar exchange rate would have provided further cause for the MPC to stay put,” she said.
“That said, we are not surprised that, like the Fed, the MPC maintained a hawkish tone. Such a tone may be key in containing inflation expectations and financial conditions while the impact of an aggressive hiking cycle takes the intended toll on economic activity.”
Samuel Seeff – Seeff Property Group chairman
Seeff Property Group chairman Samuel Seeff said the MPC’s decision to keep the repo rate unchanged is great news for the economy and property market.
“While we would have preferred a small rate cut as a boost heading into the busy season for retail and real estate, we are nonetheless pleased with the bank’s decision, especially given the inflationary pressure,” he said.
The SARB’s decision also follows suit from other central banks like the US Federal Reserve and the Bank of England, which have kept their rates unchanged.
Seeff said that while the market has contracted, it has remained resilient and, in many areas, is still ahead of the 2019 pre-Covid figures as buyers have sought to take advantage of the favourable buying conditions.
The Cape, for example, has seen another excellent year, with the upper end of the market still producing sales upwards of R20 million to over R100 million this year.
“Regardless of the challenges, people have continued to buy and sell property, and it was a good year, all things considered,” he said.
Aside from the continued positive mortgage lending conditions, Seeff said the market is further supported by the flat prices and “loads of good stock on the market”.
“The upside is that we can look forward to entering the 2024 year with the hope that interest rates will start coming down by around mid-year if the economy can settle and conditions are stable.”
Kim Silberman – Matrix Fund Managers economist and macro strategist
Matrix Fund Managers economist Kim Silberman said the SARB Governor was exceptionally dovish at yesterday’s MPC meeting, especially relative to his usual stance and relative to October’s CPI.
She said the Governor’s statement could have provided a platform for the MPC to centre the discussion on the fight against inflation.
Instead, the speech focused on the fact that while risks to inflation were substantial, monetary policy is restrictive, wage inflation is lower, and the MPC will look through temporary price shocks and focus on second-round effects – or core inflation.
“This is important given that the surprise to inflation is very much about first-round effects and very product-specific price pressures. For example, potato prices rose 64% year-on-year and eggs 24% year-on-year,” she said.
“These do not warrant a hike in interest rates. The meeting concluded that barring any big shocks to core inflation, the SARB is comfortable with rates at 8.25%.”
She said interest rates are currently deemed sufficiently restrictive to guide inflation back to 4.5%.
“We expect that the SARB will start to cut rates in line with the US Federal Reserve Bank in the first half of 2024,” she said.
“We doubt cuts will materialise ahead of the Fed, as this may negatively impact the value of the USD/ZAR.”
Professor Raymond Parsons – North-West University Business School economist
North-West University Business School economist Raymond Parsons said that, given the MPC’s continued concern about upside risks to inflation, the statement’s tone still reflected a ‘hawkish pause’.
However, he said the decision was consistent with the MPC’s assessment of the current overall balance of economic risks.
“A reasonable conclusion from the latest economic trends is that barring shocks, SA interest rates may now have peaked,” he said.
“While interest rates will stay higher for longer, further hikes may not be necessary.”
He said the continued period of stability in interest rates experienced since May this year remains a positive factor for business and consumer confidence at a time when borrowing costs are still at a 14-year high.
The SARB has acknowledged that monetary policy in South Africa is now well in restrictive territory.
Trends in retail sales, vulnerable household spending, bad debts and other relevant high-frequency data confirm weak overall domestic demand.
The MPC confirmed that there are presently no elevated demand pressures in the economy.