Standard Bank shares bad news about interest rates

The Reserve Bank is expected to begin cutting interest rates at its next meeting, kicking off its long-awaited rate-cutting cycle. However, this cycle is set to be short and shallow, with only 1% shaved off as inflation is set to remain sticky. 

This is feedback from Standard Bank chief economist Goolam Ballim and Stanlib chief economist Kevin Lings. 

At Standard Bank’s Democracy and Markets event, Ballim and Lings shared their views on South Africa’s interest rates. 

Lings said the Reserve Bank has been very conservative in tackling inflation, largely due to uncertainty surrounding South Africa’s election at the end of May. 

The Reserve Bank has been hesitant to cut rates during this period of elevated uncertainty, fearing that doing so would add further volatility to financial markets. 

Furthermore, the bank has been clear about its desire to return inflation to the 4.5% midpoint of its 3% to 6% inflation target range. 

This has led to the interest rates being kept higher for longer, with the repo rate kept at 15-year highs for an entire year. 

However, Ballim said this is set to change soon. 37 countries, particularly South Africa’s emerging market peers, have begun cutting their rates. 

When coupled with declining inflation in the US and an increased likelihood that the Federal Reserve will begin cutting its rates soon, the Reserve Bank has more room to cut rates at its next meeting in September. 

Thus, Ballim expects the Reserve Bank to cut interest rates by 25 basis points in September, followed by three more 25bps cuts in the next 12 months. 

Lings expects the same, saying the bank has done an extremely good job bringing inflation down in South Africa and will not want to see it reignited by premature rate cuts. 

This will result in the repo rate declining to 7.25% and the prime lending rate to 10.75% as inflation continues to moderate towards the Reserve Bank’s range of 3% to 6%. 

However, 100 basis points being cut in the next 12 months is unlikely to have a major impact on South African households under immense financial pressure. 

Since November 2021, the Reserve Bank has raised rates by a cumulative 475 basis points. 

This means that even after the expected 100 basis points cut over 12 months, interest rates will remain significantly higher than they were pre-pandemic. 

Ballim expects little long-term relief for South Africans, forecasting earlier this year that the repo rate will remain at 7% until 2027, with the prime lending rate still above 10%. 

Interest rates will remain higher for longer as inflation proves sticky. Standard Bank expects inflation to moderate slightly to an average of 5% over the next 12 months. 

This remains towards the upper end of the Reserve Bank’s 3% to 6% target range, ensuring the bank’s cutting cycle is short and shallow. 

Standard Bank has greatly benefited from higher interest rates, with its net interest income growing to R97.5 billion in the latest financial year and its net interest margin growing to 494 basis points. 

However, as rates remain higher for longer, they begin to pose a threat to the bank as non-performing loans rise. 

Higher rates will result in increased non-performing loans as clients struggle to cope with the rising cost of living and higher interest payments. 

Standard Bank already flagged this in 2023 and began reducing its extension of credit across its business to prevent further increases in non-performing loans. 

Its credit loss ratio rose to 98 basis points for the 2023 financial year, below its upper limit for the credit cycle.

CFO Arno Daehnke said this ratio had crossed 100 basis points in the first six months of the current financial year in a pre-closed period call with investors.