South African Reserve Bank interest rate expectations
The Reserve Bank’s Monetary Policy Committee (MPC) is meeting this week to decide the fate of South Africa’s interest rates, with experts expecting no change this time.
The South African Reserve Bank (SARB) started its hiking cycle in November 2021 and has since raised interest rates by a cumulative 475 basis points.
This has brought the country’s repo rate to a 15-year high of 8.25% and the prime lending rate to 11.75%.
The hiking cycle has been paused since May last year, with the Reserve Bank saying it will only cut once inflation has come down sustainably.
The MPC’s efforts have largely borne fruit, with the latest inflation print from May 2024 coming in at 5.2%.
While this is well within the SARB’s target range of 3% to 6%, Reserve Bank Governor Lesetja Kganyago has said he would like to see inflation anchored around the midpoint of this range, 4.5%. Only then will the SARB consider cutting interest rates.
The MPC will announce its decision on Thursday, 18 July. In anticipation, Daily Investor asked experts what they believed the bank would decide.
The experts were unanimous in their belief that the SARB will keep the interest rate unchanged at this meeting.
However, many believe this meeting’s tone will set the stage for interest rate cuts later this year, with many pricing in two cuts in 2024.
Adriaan Pask – PSG Wealth CIO
PSG Wealth chief investment officer Adriaan Pask said they expect the MPC to keep rates unchanged.
He explained that, at the May meeting, policymakers highlighted that, on balance, risks to the inflation outlook were skewed to the upside.
With South Africa’s recent rand strength, that stance may have changed, but it is unlikely that the move was sufficient to prompt a majority vote for a cut.
“If the rand strengthens further from here, we should see some downward pressure on inflation, after which cuts become more probable,” he said.
“We are also yet to see if the change in sentiment following the Government of National Unity (GNU) will accelerate growth which supports a more cautious outlook on inflation.”
Wichard Cilliers – TreasuryONE head of market risk
TreasuryONE’s head of market risk, Wichard Cilliers, expects interest rates to remain unchanged.
“We think the tone from the SARB will be dovish and will talk about potential future interest rate cuts,” he said.
“Contributing factors to this will be the rand’s strength, a decline in the country risk premium, lower inflation expectations, and global developments favouring Fed cuts later in the year.”
He said these conditions suggest the MPC can confidently deliver a rate cut at the next MPC, supported by their shift from upside to balanced inflation risks.
“Recent inflation and growth data in South Africa have been dovish, with lower food inflation, a stronger exchange rate, an improved electricity outlook, falling fuel prices, and reduced inflation expectations,” he said.
“Globally, benign US inflation and softened activity data also bolster the case for easing.”
Mike van der Westhuizen – Citadel portfolio manager
Citadel portfolio manager Mike van der Westhuizen said this interest rate decision is not as straightforward as other calls have been in previous meetings.
Inflation is moving in the right direction—towards the midpoint of the target band—but it’s still uncertain whether the MPC feels this is “enough” and whether it can remain there consistently, especially since inflation expectations are still elevated.
The formation of the GNU positively impacted the rand, leading to stable oil prices, which, given the fairly rangebound crude oil, helps alleviate disinflationary pressures.
The global central banking community currently has a more cautious stance – especially the Federal Reserve and even the European Central Bank, which has already cut rates – and on balance, the MPC is more likely to stay on hold at this meeting.
He said better policy clarity will be inferred from any revisions from the SARB on growth and CPI forecasts, in addition to the committee’s voting split.
“At Citadel we have always pencilled in a rate cut or two this year, despite what the political situation ended up being,” he said.
“Globally, inflation has moderated nicely, and the path of least resistance is to cuts (easing has taken place already in many of the emerging markets and more recently developed markets).”
With regards to government, Van der Westhuizen said the pretty seamless integration into a GNU has given markets peace of mind, “but it’s still early days”.
“Optimists will say much has changed; realists will say that there is still much work to be done and much more clarity needed around actual policy and the implementation thereof,” he said.
“While there are likely some easy wins, purely from an increased accountability perspective, the structural issues that South Africa faces are unlikely to be solved in a short space of time.”
Van der Westhuizen sees inflation temporarily falling below the mid-point of the target band, but then hovering between 4.5% to 5%.
This sets the condition for a rate cut, but it ultimately depends on how dogmatic and hawkish the MPC remains in bringing inflation much lower.
“It seems as if everyone is waiting in anticipation to see what this newly formed government can accomplish in a short space of time,” he said.
There are some positive signs, with the reduction of load-shedding on its own set to boost growth to some extent.
However, recent, high-frequency data has been fairly muted, which is in line with the global trend where growth appears to be disappointing to the downside.
China is specifically important from a South African perspective through the commodity price channel, and they have been struggling as well.
“For now, it is probably more prudent to see some evidence of turnaround before getting overly optimistic about the economy, but as mentioned, there could be some easy (but smaller impact) ‘wins’ which could provide some upside surprises in the short term,” he said.
Kim Silberman – Matrix Fund Managers economist and macro strategist
Matrix Fund Managers’ Kim Silberman said their view is in line with consensus that the SARB will keep the repo rate unchanged at the July meeting.
However, she said the vote will not be unanimous, with one or two members voting for a cut. “This will signal that cuts are coming in the September meeting,” she said.
The SARB theoretically makes interest rate decisions based on its estimate of CPI in 12 months’ time, which is currently 4.5% in the third quarter of 2025.
This implies a current real rate of 3.75%, which is 100 basis points above the SARB’s stated real neutral rate. Inflation risks appear benign, and CPI excluding administrative prices is already at the target of 4.5%.
“We expect inflation will continue to moderate, slowing to 5.0% for June 2024,” she said.
Bank of America
A recent report from Bank of America South Africa Watch, titled “Monetary Policy Preview: No Rate Cut Yet, but Dovish Signals on the Horizon”, also provided its interest rate expectations.
“We expect SARB to remain on hold on 18 July. Any minority vote for cuts will increase the likelihood of a September rate cut,” the report said.
Domestic inflation is moderating to below 5% in Q3 and Q4, and September and October CPI prints are likely to be close to the 4.5% target due to base effects.
“Softer US June CPI signals an early rate cut is possible. No SARB cuts are expected before the Fed’s actions. Earlier Fed cuts open the door for SARB cuts,” it said.
Lara Hodes – Investec economist
Investec economist Lara Hodes said in a note that the SARB is expected to keep rates on hold this week at 8.25%.
“We continue to pencil in a start to the easing cycle in November, although the risk is that the South African interest rate cutting cycle only begins in 2025,” she said.
She explained that the next FOMC meeting on 31 July should give us a clearer view of when the Fed is likely to begin cutting rates, which could impact South Africa’s hiking cycle.
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