Interest rate relief expected soon

South Africa is set for interest rate relief in the next few months, with the Reserve Bank potentially entering its cutting cycle at its next meeting in July. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who explained in his latest Investment Note that the upside risks to inflation have abated. 

He said it is vital that the Reserve Bank remain independent and can implement its monetary policy without interference, whatever form the coalition government that runs South Africa for the next five years takes. 

This is key for investor confidence in South Africa, the stability of the rand, and managing inflation. 

At the end of last month, the Reserve Bank’s Monetary Policy Committee (MPC) voted to leave the repo rate unchanged at 8.25%, with the prime lending rate at 11.75%.

The decision was unanimous, as all members of the MPC preferred to keep the rate on hold. Odendaal said this was expected, as an interest rate cut would exacerbate the uncertainty created by South Africa’s election. 

However, the tone of the meeting statement was more upbeat. Oil price and exchange rate risks have abated somewhat, and the Reserve Bank now forecasts that inflation will reach its 4.5% objective in the second quarter of next year, earlier than previously stated. 

The Bank remains concerned about elevated surveyed inflation expectations, which tend to lag actual inflation. In other words, as inflation falls, expectations will probably be pulled lower. 

Inflation risks are now viewed as being “balanced” rather than “biased upwards” – a key shift in sentiment from the MPC, Odendaal said. 

Barring a serious market dislocation, Odendaal said the MPC is likely to start a modest cutting cycle in the coming months, perhaps as early as the next meeting in July.

As always, the Reserve Bank will keep a close eye on international interest rate developments, with Friday’s US inflation reading a touch softer than expected.

A lower repo rate will lift the cyclical performance of the economy but not its structural growth trend, Odendaal warned.  

Over the last few years, every MPC statement has urged the government to implement structural reforms that will improve growth and lower inflation.

The closing paragraph of the May MPC statement reiterates the call for “a prudent public debt level, improving the functioning of network industries, lowering administered price inflation, and keeping real wage growth in line with productivity gains.” 

In a press conference, Governor Lesetja  Kganyago noted that the Reserve Bank remained committed to achieving macroeconomic stability. 

He said that if fiscal policy changed in an unwelcome direction, monetary policy would do “the heavy lifting to deal with inflation because that is the mandate of the central bank.” 

This was the case during the Zuma years when monetary policy had to overcompensate for the lack of policy credibility elsewhere in government. 

The independent central bank, together with the independent judiciary, a free and vocal media, and other institutions, will continue to keep disaster at bay in South Africa, Odendaal said. 

Finally, as much as our attention is going to be glued to local political developments for the next few weeks, the global cycle remains crucial for South African markets. 

As in 2021, a surge in global commodity prices gave the economy and its markets a lift despite serious domestic infrastructure constraints. On the other hand, a global downturn will have the opposite effect.

These factors are largely out of South Africa’s control, and on top of it, the country might need to wait for an extended period until there is more certainty.