South Africa to cut interest rates sooner than expected

Traders brought forward their bets for South Africa’s first interest rate cut to March 2024 after the amount of money flowing into the economy and loans to the private sector recorded their weakest growth in almost two years.  

Growth in money supply and private credit extension rose less than expected at 6% and 3.9% in October, respectively, from a year earlier.

The median estimate in a Bloomberg survey was for growth of 7.1% and 4.3%, respectively.

Forward-rate agreements used to speculate on borrowing costs show traders are now pricing in a 25-basis-point rate cut in March, which is sooner than most economists expect.

Before the data release, those bets had been for a rate cut in May.

The slowdown in both indicators may be signaling strain in households and corporates’ finances from higher interest rates.

Prior to holding borrowing costs in July and at two subsequent meetings, the central bank’s monetary policy committee raised interest rates by a cumulative 475 basis points since November 2021 to tame inflation.

Governor Lesetja Kganyago said last week that with rates at 8.25%, the policy is restrictive, consistent with the inflation outlook and elevated inflation expectations.

“Serious upside risks to the inflation outlook remain” and the MPC stands ready to act should risks begin to materialize, he said.

Price pressures have been above the midpoint of the bank’s 3% to 6% inflation target range, where the MPC prefers to anchor expectations for more than two years.