What to expect for interest rates tomorrow
South Africa’s Monetary Policy Committee (MPC) is meeting again this week to determine the country’s interest rate, with many experts counting on a 25 basis point cut.
The South African Reserve Bank (SARB) has been in a hiking cycle since November 2021.
During the Covid-19 pandemic, the SARB maintained lower interest rates to provide some relief for struggling households.
However, the easing of restrictions following the pandemic saw a spending boom in South Africa, which saw the country’s inflation climb.
Noticing this trend, the SARB started hiking the country’s interest rates in November 2021.
Since then, it has raised the country’s interest rates by a cumulative 475 basis points, bringing the repo rate to a 15-year high of 8.25% and the prime lending rate to 11.75%.
Its efforts have largely borne fruit, with inflation having hit a peak of 7.8% in July 2022 but remaining on a downward trend since.
The latest inflation print saw CPI at 4.6% in July, which is well within the SARB’s target range of 3% to 6%.
While the SARB is still in a hiking cycle, it has kept interest rates unchanged since May 2023.
Despite calls to start cutting rates, the Reserve Bank has remained steadfast in its goal to tame inflation sustainably and anchor it around the mid-point of its target range, 4.5%.
With inflation now at 4.6%, many experts believe that the September MPC meeting will see the SARB cut interest rates for the first time in years.
This would bring much-needed relief to South African consumers, who are under significant pressure from the country’s high cost of living, exacerbated by high interest rates.
However, many experts have warned that the cutting cycle will be far shorter and more shallow than many may hope, with only around 100 basis points of cuts expected.
Ahead of the MPC meeting on Thursday, 19 September, Daily Investor reached out to experts for their interest rate expectations.
There was a consensus that the committee will opt to reduce rates, with a 25 basis point cut as the most likely outcome.
Maarten Ackerman – Citadel chief economist
In light of recent economic data, Citadel’s Maarten Ackerman believes it is now almost certain that the US and South Africa will see interest rate cuts this week.
Ackerman explained that US inflation is now within the Federal Reserve’s target range, but deteriorating employment data has pushed the central bank toward swift action.
“It’s no longer a question of when the rate cuts will happen, but by how much. The market is expecting a 25 basis point cut, but the Fed may be considering a more significant move, potentially a 50 basis point reduction,” he said.
He added that this decision will influence the SARB, which keeps a close eye on the US to maintain interest rate differentials and protect the rand.
With local inflation in the mid-range of SARB’s target, Ackerman anticipates a 25 basis point cut domestically as well.
“This is a pivotal moment,” Ackerman said. “Both the Fed and SARB are likely to begin the long-awaited rate-cutting cycle, setting the stage for economic adjustments in the months ahead.”
- Prediction: 25 basis point cut
Frederick Mitchell – Aluma Capital chief economist
Aluma Capital chief economist Frederick Mitchell said South Africa’s inflation rate has decreased significantly in the first half of 2024, dropping from 7.3% in July 2022 to 4.7% in July 2024.
He explained that this decline is due to higher interest rates, rising consumer debt, and reduced overall demand, which have put downward pressure on prices throughout the economy.
Globally, inflationary pressures also grew as excess Covid-relief funds led to widespread price increases, including in South Africa, where import prices escalated in dollar terms.
Both consumers and businesses struggled with rising prices and diminishing purchasing power, slowing down demand and price increases.
With inflation easing both domestically and internationally, some EU countries have already reduced interest rates and recession fears in the US could prompt the Fed to do the same in mid-September.
“Considering the low demand, subdued economic activity, slowing inflation in South Africa, and a potential rate cut in the US, a 25-basis point reduction in South Africa’s interest rate is anticipated,” he said.
However, the South African Reserve Bank has warned that any increase in inflation or inflation expectations in the coming months could result in smaller-than-expected rate cuts in the short to medium term and much can still happen from now until the 19 th of September when the rate announcement is made.
- Prediction: 25 basis point cut
Lourens Pretorius – Matrix Fund Managers fixed income portfolio manager
Matrix Fund Managers’ Lourens Pretorius said the SARB, along with the US Federal Open Markets Committee (FOMC), is about to embark on a rate-cut cycle commencing this week.
“Not all rate-cut cycles look the same, however, and we would caution to expect the SARB to follow the FOMC step-by-step,” he said.
He explained that the US policy rate, currently at 5.33%, is priced to be reduced by 40 basis points on Wednesday and a cumulative 250 basis points of cuts to 2.80% in December 2025.
“After a particularly dovish message delivered by Federal Chair Jerome Powell at the Jackson Hole conference in August, the market moved the debate from when cuts would begin to how large and how deep they would be,” he said.
For the South African Reserve Bank, inflation, and maybe more importantly, forward inflation expectations, have been moderating over the last three months due to a combination of lower fuel, food and administered prices and a firmer rand.
“It is quite conceivable that South Africa will experience annual price increases of less than 4.0% in Q4 of 2024,” he sid.
“More importantly, sustained inflation outcomes closer to the current midpoint of the target of 4.5% appear to be achievable throughout 2025.”
South Africa’s neutral real rate is somewhere between 2.5% and 2.75%, which would mean a policy setting of 7.0% to 7.25% – or a cumulative 100 to 125 basis points cutting cycle – is achievable considering forward inflation expectations of 4.5%.
“Whilst there is no doubt that there is room and certainly a need for local interest rate relief, we do not expect the SARB to be influenced into larger local cuts by larger US interest rate cuts,” he said.
“We would be surprised to see a larger cut than 25 basis points by the SARB, especially taking account of the quantum of cumulative cuts available to them.”
He added that the SARB has often expressed its desire to align South Africa’s inflation and targeted inflation to our peer economies.
There are multiple associated benefits to lower long-run inflation, amongst these a stable and competitive currency.
“To this extent, it is quite plausible that the SARB may view the current slowdown in local and global inflation as an ideal opportunity to re-anchor longer-term inflation expectations at more permanently lower levels,” he said.
“This would imply some short-term pain for longer-term gain with the SARB possibly electing moderately tighter short-term monetary policy in favour of significantly lower rates if successful with re-anchoring long-term inflation expectations.”
He said such a prudent and somewhat conservative approach would continue to support the rand and bond pricing, as the SARB’s commitment to lower and stable inflation would become even more evident.
“It is not clear that there is any long-term trade off or sacrifice between growth and inflation, hence taking it slow for now will likely be the most appropriate response,” he said.
- Prediction: 25 basis point cut
Albert Botha – Ashburton Investments head of fixed income
Ashburton Investments’ Albert Botha said the Federal Reserve and SARB are expected to cut rates this week, with the SARB facing the challenge of making its decision before knowing the Fed’s move.
The Federal Reserve is announcing its decision on 18 September and the SARB on 19 September, but the MPC meeting takes place for days before that.
Botha said the recent rate hiking cycle has been unprecedented, driven by high inflation. While South Africa’s inflation rate has been lower than the US, both countries have experienced significant economic impacts.
Despite inflation being under control in South Africa, the Fed’s recent inflation scare and slow progress in returning to target levels have constrained the SARB’s actions.
However, both the Fed and SARB are expected to cut rates this week, with the Fed potentially lowering rates to 3.5%. The SARB is likely to follow suit, with projections suggesting the repo rate will bottom out between 6.25% and 6.75%.
Botha said lower rates will benefit borrowers, who will see reduced home loan and credit card payments.
Market participants can also expect positive impacts on riskier asset classes like property and equity. However, fixed income funds may yield less in absolute terms.
“We are entering a new chapter in local and global markets, with lower inflation and falling interest rates,” he said.
“However, this era will likely differ from much of the last 20 years. Interest rates globally are expected to remain in positive real territory for the foreseeable future, unlike much of the recent past post the 2008 crises.”
“These higher rates should better balance the needs of both borrowers and lenders, potentially leading to improved long-term outcomes for both.”
Samuel Seeff – Seeff Property Group chairman
Seeff Property Group chairman Samuel Seeff said interest rate cuts cannot be delayed any longer, and the time has now arrived for an interest rate cut.
“The interest rate has now simply been too high for too long and cannot be delayed any longer. It has caused more damage than good,” he said.
Seeff said there are more than adequate reasons for the Reserve Bank to provide an interest rate relief to benefit consumers, the economy and the property market.
He explained that the higher-than-necessary rate is hampering growth in the economy and property market.
“The economic outlook has improved visibly, and we are seeing the benefits of the Government of National Unity (GNU) in aspects such as billions of rand flowing into South African bonds, while the JSE has hit record highs over the last month,” he said.
“The uninterrupted energy supply will further benefit the economy. Economic indicators have also improved with aspects such as the falling oil price leading to petrol price cuts which further benefits consumers and the economy.”
Inflation has also hit a three-year low and is expected to come down further to within the Reserve Bank’s target range.
Seeff said leading central banks have cut their rates in recent months including the Bank of England and the European Central Bank.
The US Fed is also expected to cut its rates this week following the decline of US inflation to a three-year low, with some punting the potential of as much as a 50 basis point cut.
“While the South African economy desperately needs a 50 basis point cut, we should, at the very least, see a 25 basis point rate relief from the Reserve Bank this week,” he said.
“It is almost unthinkable that the Bank would remain tone deaf to the plight of the economy and consumers.”
- Prediction: 25 basis point cut
Lara Hodes – Investec economist
Investec’s Lara Hodes said August’s CPI Inflation reading is projected to have increased by 0.3% month on month, remaining unchanged at 4.6% when measured on a year-on-year basis.
August is a moderate survey month, with private-sector hospital costs adjusted and municipal charges for water, rates, taxes and electricity surveyed again.
She added that the 15 cents per litre cut in the petrol price will likely have had a minimal effect on the headline reading.
In addition, food inflation, another large component of the CPI index, is expected to have eased somewhat in August, underpinned by a decline in the international prices of agricultural food commodities and a strengthening of the rand against the USD.
“We expect a start to the easing cycle with a 25 basis point reduction in the repo rate to 8.00%,” she said.
“Inflation has eased globally and domestically, with the Fed widely projected to cut the fed funds rate this week.”
- Prediction: 25 basis point cut
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