Good news for interest rates in 2024

South Africa’s inflation is likely to average 4.5% year-on-year in 2024 or lower, which could see the South African Reserve Bank (SARB) cut interest rates as soon as July of this year.

This is the view of Investec chief economist Annabel Bishop, who said that, despite this optimistic projection, inflation in South Africa still faces upside risks.

These risks include food prices, a weaker rand and higher global commodity prices.

“Specifically, we currently forecast that CPI inflation will reach 4.5% year-on-year in July this year, dipping to 3.4% year-on-year in October and moving back towards 4.0% year-on-year in December on base effects, although the upside risks mentioned could derail this outcome,” she said.

Bishop explained that an average of 4.5% for 2024, likely similar for 2025, if not slightly lower, would imply interest rate cuts, with monetary policy increasingly restrictive from mid-Q1 2024 without easing rates.

“However, given the marked weakness in the rand, which has contributed significantly to higher inflation, the SARB’s Monetary Policy Committee (MPC) would likely favourably view rand strength to drive inflation lower,” she said.

Bishop said the rand remains undervalued, at over R3.00/USD removed from its fair value against the US dollar. 

“Such substantial weakness has been instrumental in contributing to higher fuel and food costs in South Africa, amongst other inflationary effects.”

She said that should the US cut interest rates in the first half of 2024. The rand could see some strength as the difference between the US and South African bank rates widens if South Africa does not cut.

March is currently viewed as the first month the US could likely cut rates in 2024.

She said inflationary pressures, globally and domestically, are on a general downward trend, adding to expectations of interest rate cuts. 

“This does not mean inflation consistently falls (at every print), but instead, in general, is tending to decline,” she explained.

Bishop added that fuel prices are key for South Africa’s inflation outcomes, and November’s large R1.78/litre cut in the petrol price helped pull inflation down to 5.5% year-on-year in November, from 5.9% in October.

In addition, December’s -64c/litre cut should aid inflation lower to around 5.2% year-on-year.

“While inflation is likely to temporarily return to around 5.8% year-on-year in January’s outcome for this year, it should drop to near 5.3% in February and 4.7% in March, as an overall downward trend is maintained, allowing for interest rate cuts this year,” she said.

The petrol price fell at the start of January by 76c/litre and diesel by R1.18/litre, with further modest fuel cuts building for February, which will detract from inflationary pressures in those months, she added.