Interest rate relief may come sooner than expected

The Reserve Bank may begin to cut interest rates sooner than expected in South Africa due to the positivity surrounding the Government of National Unity (GNU) and good progress on structural reforms in the electricity and rail sector. 

South African consumers and the economy have come under immense pressure from elevated interest rates, which have stayed at 15-year highs for over ten months. 

The Reserve Bank initiated an unprecedented hiking cycle in November 2021, hiking rates by 475 basis points within two years. 

This brought the repo rate to 8.25% and the prime lending rate to 11.75% to combat rising inflation that has remained sticky. 

Another reason the Reserve Bank has kept interest rates high is the heightened volatility within South Africa’s financial markets due to the national election at the end of May and geopolitical tension. 

The bank is hesitant to cut rates during periods of high volatility as it risks adding more uncertainty to the market and destabilising the financial system. 

However, the tide appears to be turning, with greater political certainty following the formation of the GNU and clarity around the continuation of economic policy. 

FNB senior economist Siphamandla Mkhwanazi said this is a key factor in helping the Reserve Bank bring down rates at the launch of the bank’s Retirement Insights Survey. 

He explained that South Africa’s economic environment has been characterised by heightened uncertainty and a cost of living crisis for the past two years. 

A reformist government committed to ongoing reforms in key sectors of the economy will ease these burdens on consumers and create a virtuous cycle that places downward pressure on inflation and, thus, interest rates. 

The formation of the GNU has given investors greater certainty that ongoing reforms will continue and that the private sector will continue playing a larger role in the local economy.

In particular, reforms in the electricity sector have proven to be highly effective, with South Africa experiencing over 100 days without load-shedding for the first time since 2020. 

This will ease inflation by reducing the cost of doing business in the country and encourage investment in the economy. 

Mkhwanazi said these benefits are currently hard to see, with only the financial markets giving an indication that sentiment towards South Africa is changing. 

A common error is made here by South Africans. Many think the financial markets are not linked to the broader economy and do not affect the ordinary ‘man on the street’. 

Firstly, improved investor confidence brings with it increased inflows into local assets, which boosts their prices and aids wealth creation. 

As asset prices continue to appreciate, South Africans’ retirement savings will benefit along with any other investments they have.

More importantly for the country, the value of the rand is boosted by increased inflows into local assets as demand for rand-denominated bonds and stocks rises. 

A stronger rand significantly reduces headline inflation in South Africa as the country imports many basic necessities – particularly fuel. 

Mkhwanazi said a stronger rand will drive down the price of oil in rand terms, making it cheaper to import and thus reducing the price at the pump. 

With 85% of all goods in South Africa being transported via road at some points, the price of fuel has a substantial impact on inflation. 

Mkhwanazi said this will enable the Reserve Bank to begin cutting rates soon. It is most likely to begin its cutting cycle in September but may start as early as its next meeting this month.