Interest rate warning for South Africa

Investec chief economist Annabel Bishop said it is becoming increasingly likely that South Africa’s interest rates will only be cut in November this year, and there is a possibility of no rate cuts in 2024.

Bishop said the South Africa Reserve Bank (SARB) recently reaffirmed its resolve to continue to combat high inflationary pressure in South Africa through high interest rates.

The country’s high inflation has seen the SARB hike interest rates to a 14-year high, with the repo rate currently at 8.25%.

However, South Africa’s latest inflation print saw inflation remain stubbornly above 5%, with March’s CPI at 5.3%.

The SARB has repeatedly said interest rates will only be cut once CPI inflation reaches and is sustainably anchored around 4.5%, the midpoint of its target range.

“This is increasingly looking like an interest rate cut will only materialise in November for South Africa instead of September,” Bishop said.

This is because CPI inflation is only likely to be at 4.5% for one month in September, while the inflation print is also delivered a month late, in October. 

“Indeed, there is a risk of no interest rate cut this year,” she warned.

FNB economists recently warned that if the SARB continues to keep interest rates as high as they are beyond when it is necessary, South Africa could face a technical recession.

In their latest Economic Weekly, FNB economists said South African consumers are under increasing pressure due to the SARB’s high interest rates.

The SARB’s Monetary Policy Committee (MPC) has hiked interest rates by a cumulative 475 basis points since the start of the current hiking cycle.

After easing interest rates during the Covid-19 pandemic to provide relief for households, the MPC started raising rates in November 2021 when faced with rising inflation.

Since then, the SARB has raised the repo rate to 8.25% and the prime lending rate to 11.75%. 

The economists said South Africa’s economy is grappling with a severe environment, with low economic growth and consumers bearing the brunt of the tight financial conditions. 

This can be seen in household consumption expenditure, which crawled at 0.7% last year, a significant drop from 2.5% in 2022.

The economists said this reflected a mild technical recession between the second and third quarters of 2023.

“Our assessment of the restrictive broader financial conditions underscores a continued decline in inflation-adjusted credit growth,” they said. 

“Moreover, we note a weaker currency, a sharp dip in the inflation-adjusted JSE All Share index, and a sustained fall in real residential property price growth.”

They said that while inflation may have peaked, it is still not fully under control, and upside risks remain. Therefore, the Reserve Bank must be careful not to cut interest rates too soon.

However, they also warned that prolonging rate cuts beyond when high rates are necessary could further stifle growth and heighten the likelihood of a technical recession.