Bigger-than-expected interest rate cuts possible

Deeper interest rate cuts in September and November are possible for South Africa, with inflation continuing to moderate and the absence of strong consumer demand. 

This is feedback from Old Mutual’s chief economist, Johann Els, who said that the Reserve Bank has substantial room to cut interest rates in the rest of 2024. 

Since November 2021, the bank’s Monetary Policy Committee (MPC) has raised interest rates by a cumulative 475 basis points, putting significant pressure on South African households. 

The MPC saw such an aggressive hiking cycle as necessary to tame inflation and has since been cautious about cutting rates out of fear of reigniting inflation. 

Premature and deep interest rate cuts have the potential to weaken the rand as capital goes elsewhere for better returns on fixed-income assets. This would, in turn, make imports more expensive and increase inflation. 

However, the rand has held up better than expected, and with the Federal Reserve likely to begin its cutting cycle as well, the MPC has more room to cut rates in September and November. 

As it gears up for its meeting on 19 September, expectations are mounting for an interest rate cut. 

Inflation has eased considerably, with the headline rate dropping to 4.6% in July from 5.1% in June, comfortably within the Reserve Bank’s target range. 

Els said global economic factors, such as the anticipated US Federal Reserve rate cut just a day earlier, are also adding pressure on the bank to take a more accommodative stance. 

With inflation under control and consumer demand remaining subdued, the environment seems ripe for monetary easing, signalling potential relief for South African consumers and businesses.

“I expect interest rates to be cut, perhaps more than expected by the market,” Els said. He pointed to the combination of stabilising inflation and the absence of strong consumer demand pressures as reasons why the bank should cut rates at its September and November meetings. 

The Reserve Bank has successfully brought inflation within its target range, and with global pressures, particularly from the US, starting to ease, the path for a rate cut seems clear.

An important consideration is the timing of the US Federal Reserve’s meeting, which will occur just one day before South Africa’s MPC meeting. 

The Fed is expected to lower rates by 50 basis points, which could set the tone for the SARB’s decision. 

A Fed rate cut could ease global financial conditions, supporting a stronger rand and providing the Reserve Bank with further impetus to reduce rates. 

Els also noted that while the year-on-year change in inflation shows a reduction, underlying price pressures have been weakening for some time. 

“The underlying pace of headline inflation over the last six months sits at just 3.4%, while the last three months show only 1.1%.” 

The corresponding numbers for core inflation are 4% and 2.8%. This downward trend indicates that inflationary pressures have significantly diminished, especially in core inflation, which excludes volatile items like fuel and food.

Despite these encouraging signs, Els cautioned that inflation remains a long-term concern, particularly with fixed basket weightings that don’t capture changes in consumer spending habits. 

However, he remained optimistic about inflation continuing to fall, saying it could drop as low as 3.5% in October. 

Thus, the Reserve Bank could reduce rates by 25 basis points in September and 50 basis points in November, taking the repo rate to 7.5% by year-end.

This would provide much-needed relief for South African consumers after enduring the highest interest rates in 15 years. 

Lower rates could spur economic growth, though structural issues such as labour costs and sluggish productivity gains continue to weigh on the economy.

Els emphasised that while monetary policy can provide temporary relief, the underlying structural challenges remain a critical issue for long-term growth.