Reserve Bank interest rate cuts expected next month 

The Reserve Bank should begin cutting interest rates next month as inflation eases, the US Federal Reserve begins its cutting cycle, and the rand remains resilient. 

This will mark the beginning of the bank’s cutting cycle, potentially boosting economic growth and providing much-needed relief for South African consumers. 

Since November 2021, the Reserve Bank has hiked interest rates by 475 basis points to a 15-year high in response to rising inflation. 

The bank has been reluctant to cut rates since then for fear of reigniting inflation and weakening the rand. 

However, there is now increasing space for the Reserve Bank to bring interest rates down in South Africa as inflation appears to be sustainably near the midpoint of its 3% to 6% target range. 

In particular, core inflation, which excludes volatile food and fuel prices, declined to 4.5% in its latest reading, which aligns with the Reserve Bank’s objective. 

Old Mutual Wealth investment strategist Izak Odendaal explained that the resilience of South African assets and the rand also increases the likelihood of interest rate cuts in September. 

“It is notable that South African investments have held up relatively well. Usually, South African assets are “high beta” to global markets, meaning they fall by more in times of stress,” he said. 

During the market meltdown early last week, South African assets gave little ground and appeared less vulnerable than their emerging market peers. 

This could be due to the positive aftereffects of forming the Government of National Unity (GNU), which has fundamentally strengthened local assets. 

Odendaal noted the risk premium on South African government bonds has declined following the creation of the GNU and, in particular, its commitment to sustainable fiscal policies 

This has supported local fixed-income assets and the rand, which is basically flat against the dollar so far in 2024. “This is almost unheard of in a time of global market anxiety,” Odendaal said. 

This, together with looming cuts by the Fed means the Reserve Bank should have the confidence to start lowering the repo rate at its next meeting.  

However, while the interest rate-cutting cycle will likely begin next month, it may not offer much relief to South African consumers. 

This is because the cycle may be short and shallow, with the Reserve Bank halting cuts at 100 basis points. 

There are still strong drivers of inflation in South Africa, particularly from administered price increases for electricity and water. 

Strong labour unions have also placed upward pressure on wages, demanding increases above inflation while productivity stagnates. 

Coronation economist Marie Antelme also expects the Reserve Bank to limit its rate cuts due to the government’s deteriorating financial health. 

Rates may also stay higher for longer if the Reserve Bank’s inflation target shifts down to 3%, away from its range of 3% to 6%. 

This does not mean that rate cuts will not bring substantial relief to consumers and boost the local economy. 

Even a short and shallow rate-cutting cycle of 100 basis points will bring down the average home loan repayment by over R800 per month. 

Motorists will also experience some relief, with the average car loan coming down by over R206 per month. 

This relief will free up disposable income and boost consumer spending, which is the largest driver of GDP growth in South Africa. 

Disposable income is also set to rise following the implementation of the new two-pot retirement system. 

Researchers from the Reserve Bank estimate that between R31 billion and R79 billion will be withdrawn under the new system, putting cash in the hands of consumers and boosting spending. 

This will also have a positive impact on the government’s debt burden, reducing the debt-to-GDP ratio and boosting tax revenue.