South African Reserve Bank Governor (SARB) Lesetja Kganyago said South Africa would only see interest rate cuts when inflation has sustainably come down to the mid-point of its target range. Many experts believe it will only happen in the second half of 2024.
Kganyago told CNBC Africa that monetary policy decisions are not based solely on the most recent inflation data but also on the inflation outlook. To explain why this is necessary, he pointed to South Africa’s inflation readings in 2023.
The current interest rate hiking cycle started in November 2021, after inflation had started trending upward and CPI inflation reached 5.5% year-on-year.
Inflation kept climbing until it hit its peak at 7.8% in July 2022, when CPI started trending downward.
South Africans rejoiced in June 2023, when CPI inflation fell within the Reserve Bank’s target range of 3% to 6% for the first time in over a year, reaching 5.4%.
The next month, in July 2023, CPI inflation fell even further to 4.7% – very close to the mid-point of the target range around which the Monetary Policy Committee (MPC) intends to anchor inflation expectations.
However, following this low reading, inflation started trending upward again, reaching 5.9% in October.
While inflation came down again slightly in November, Kganyago said this shows that one reading does not provide sufficient reason for the MPC to cut interest rates.
“Don’t try to figure out what the decision might be based on one monthly figure,” Kganyago warned.
“There’s so much uncertainty out there about the inflation outlook among central bankers, and we are no exception.”
“Yesterday’s and today’s inflation figures do not help determine the monetary policy rate – what matters is what inflation is in the next 12 to 24 months.”
Since the hiking cycle started in November 2021, the MPC has hiked the repo rate by a cumulative 475 basis points, bringing the repo rate to a 14-year high of 8.25%.
However, Kganyago reiterated that the MPC must see inflation decline sustainably to 4.5% and stay there for South Africa to see interest rate cuts.
Many experts expect this to happen in the second half of this year and for South Africa to see its first interest rate cut in July 2024.
Investec chief economist Annabel Bishop forecasts that CPI inflation will reach 4.5% year-on-year in July this year, dip to 3.4% in October, and move back towards 4.0% in December.
Bank of America also expects the MPC to only cut rates in the second half of the year, with the first cut in July.
“The bad news is that the cutting cycle is likely to be shallow – a cumulative 125 basis points over two years to 2025 compared with 475 basis points of hikes from November 2021 to May 2023,” said Bank of America senior economist Tatonga Rusike.