Another pause – experts react to South Africa’s interest rate decision

Lesetja Kganyago

The Monetary Policy Committee’s (MPC) decision to keep South Africa’s interest rates stable for the fifth meeting in a row was widely anticipated by experts, who still project a rate hike later this year.

On 28 March, the South African Reserve Bank’s (SARB) MPC unanimously decided to keep the hiking cycle paused and the repo rate unchanged at 8.25%.

“On balance, the various risks to the inflation forecast are skewed to the upside,” SARB Governor Lesetja Kganyago said.

He highlighted food prices as a large contributing factor, saying, “We are at a difficult juncture”.

“Last year, food inflation hit its highest levels since 2008. Food inflation has now slowed,” he said.

“But this is a critical time in the growing season, and it has been unusually hot and dry, which may cause food inflation to pick up again.”

The decision to pause was in line with most experts’ expectations, who expect the SARB to keep rates stable in the first half of the year and only consider rate cuts in the second half of the year.

In an interview earlier this year, the governor said the MPC would like to see inflation come down sustainably to the mid-point of its target – 4.5% – before interest rate cuts will be considered.

Many experts believe this will happen in the second half of this year and after the US Federal Reserve has started to cut its interest rates.

Harry Scherzer – Future Forex CEO 

Future Forex CEO Harry Scherzer said that given South Africa’s consumer inflation ticked up from 5.3% year-on-year to 5.6% in February 2024, the SARB’s decision to hold the repo rate at 8.25% was an expected move. 

“We know that SARB will want to see inflation sustainably at or below the midpoint of its target range – 4.5% – before rate cuts will be considered,” he said. 

“With upward inflationary pressure on the agricultural sector owing to the El Nino weather conditions and the US’ latest MPC meeting signalling no indication of imminent rate cuts, it’s likely that we’ll only see the first rate cut even later in 2024.”

However, he is optimistic that South Africa will see CPI fall to the target in the second half of the year. 

He said lower interest rates would boost consumer confidence and give the economy a shot in the arm, and it would also allow investors to take bigger risks.

Richard Gray – Harcourts South Africa CEO

Harcourts South Africa CEO Richard Gray said he feels the governor has missed an opportunity to provide desperately needed relief to the average South African homeowner.

He said the country’s citizens are battling with repaying their mortgage loan debt and struggling with the high cost of living and servicing other short-term debt.

“Inflation is not at current levels because people are spending wildly and recklessly. It is higher because of the weak rand, high fuel prices and high food prices,” he said.

“The fastest way to provide relief to consumers is to decrease the cost of their debt. Hopefully, the first rate cut is not far off.”

Mamello Matikinca-Ngwenya – FNB chief economist 

FNB chief economist Mamello Matikinca-Ngwenya said the decision to leave interest rates unchanged comes as expected by the market. 

“While many spectators look for clues on the start of the cutting cycle, a few factors are worth monitoring,” she said. 

Firstly, she said that although the US Fed recently upheld its expectations of 75 basis points of cuts this year, it has revised its 2024 growth and core inflation forecasts upwards and reduced its anticipation of rate cuts over the longer run. 

This, along with the recent shift in Japan to positive interest rates, emphasises that real interest rates will remain high for long. 

Nevertheless, she said the European Central Bank and the Fed are broadly expected to start cutting rates around the middle of the year, which should create some space for the SARB. 

Secondly, the risk premium on South African assets could move further away from the long-term average ahead of the elections.

However, she said a “reform-friendly” outcome should support improved risk sentiment and a recovery in the rand, which would entrench the deceleration in inflation in the second half of 2024. 

Thirdly, while disinflation is expected in the latter part of the year, she said upside risk prevails.

These risks centre around adverse weather conditions and cost pass-through pressures. 

“In all, these factors suggest that even as we can hope for lower rates in H2 2024, an air of caution should persist, and the eventual cutting cycle will likely be shallow,” she said.

RMB economists

Economists at RMB said the SARB’s decision was unsurprising.

They pointed out that the MPC made a slight revision to its 2024 inflation projection, now expecting inflation at 5.1%, up from 5.0% previously. 

The forecasts for the subsequent years remain stable at 4.6% in 2025 and 4.5% in 2026. The committee assessed risks to its inflation outlook to be on the upside. 

“While the recent moderation in inflation expectations is a positive development, the SARB remains cautious about expectations in the outer years,” they said. 

“It recognises that the ability to absorb unforeseen shocks may be limited if these expectations persist at elevated levels.” 

In particular, they said upside risks to food prices from recent hot and dry weather were highlighted while the weaker rand poses further risks, particularly as expectations for rate cuts in advanced economies are being pushed further out.

Professor Raymond Parsons – North-West University Business School economist 

“As widely expected, the MPC decided to yet again leave interest rates unchanged,” said Professor Raymond Parsons. 

“While most analysts nonetheless believe that, barring shocks, rates have now peaked in South

Africa, the MPC, for understandable reasons, still sees inflation risks as being on the upside.”

He said the SARB remains highly cautious amid the combined uncertainties it sees generated by factors such as ‘sticky’ inflation, rand volatility, US interest rates, and South Africa’s pending elections.

“Monetary policy will, therefore, not be recalibrated at this juncture and hence the decision to leave rates high for longer,” he said. 

“In the meantime, though, the continued prospect of unchanged borrowing costs is nevertheless a stabilising factor in consumer and business confidence, together with the prospect of lower inflation later in the year now being pencilled in by several analysts.”

He explained that, for the MPC, the timing of any easing in interest rates clearly remains directly linked to future inflation trends and a further reduction in inflationary expectations. 

The MPC’s message is that it will not start cutting rates until inflation visibly winds down and is entrenched at the mid-point of the SARB’s inflation target range of 3%-6%. 

“The SARB wants to be satisfied that the outcomes are sustainable. That said, it now seems unlikely that the SARB will begin to reduce interest rates until the second half of 2024.” 

“By then, it may be anticipated that, in general, the key inflation data will be more favourable and, in particular, that the outcome of the elections will also be known.”

However, he said that even if interest rates begin to ease in the latter half of 2024, the initial cut will probably be no more than 25 basis points.


Top JSE indices