Bad news for interest rates in South Africa

The Reserve Bank is likely to keep interest rates elevated until the global environment stabilises and inflation is sustainably lower in South Africa, with prices in some areas beginning to rise sharply. 

Stanlib chief economist Kevin Lings recently outlined why the Reserve Bank is adopting a more cautious approach to interest rate cuts than some expected. 

The bank’s Monetary Policy Committee (MPC) opted to keep rates unchanged in March amid global uncertainty and a cautious United States Federal Reserve. 

However, Lings explained that it is not all about global factors, with local pricing pressures and constant debate about a lower inflation target pushing the MPC towards a more restrictive monetary policy. 

The latest inflation data for February showed that CPI rose by 0.9% month-on-month, which is very high by historical standards. 

Lings explained that much of this was due to medical aid inflation, which rose by 10.5% year over year as medical aid schemes imposed their annual price hikes. 

Other areas where prices are rising quickly are electricity and water, where the government has imposed above-inflation price increases. 

Another driver of inflation is the price of education, which has consistently risen above inflation and remains above the Reserve Bank’s target range of 3% to 6%. 

Inflation in these areas is likely to remain elevated as Eskom’s 12.74% electricity tariff increase comes into effect from 1 April. 

“What is helping us enormously is that there are areas, particularly in goods inflation, which remain especially low. Things like the cost of clothing, footwear, and appliances,” Lings said. 

“A lot of these categories are in the range of 1% to 2% or are actually in deflation. Now that is unlikely to persist for much longer, so South Africa’s inflation rate is likely to be above 4.5% by the end of the year.” 

Lings explained that the Reserve Bank wants to bring South Africa’s inflation rate down to a sustainable level closer to 3% than the midpoint of the target range of 4.5%. 

“The inflation target has not changed, and the Reserve Bank keeps referencing 4.5% as the actual target, but I think, in truth, they would prefer a target closer to 3%,” he said.

“I think there is an ongoing effort by the MPC to try to engineer an inflation rate that is closer to 3% over a period of time, and that does imply a restrictive level of interest rates.” 

Global concerns

The other major concern for the Reserve Bank is the highly uncertain global economic backdrop, with markets being extremely unsettled. 

“There is no doubt that the tariffs from the Trump administration are unsettling financial markets and creating the risk of a general increase in prices,” Lings said. 

This general increase is likely to occur as many countries have been clear that they will implement retaliatory tariffs on exports from the United States. 

Not only will this harm global trade and growth, but it will drive costs higher as more friction will be introduced into the system. 

“Clearly, in this environment, the Reserve Bank does not want to put the rand at more risk, and if they cut interest rates further, that is the risk they would be taking on,” he said.

Lings does not think the rand would come under significant pressure if rates are cut in South Africa as local assets still offer foreign investors a very high level of real yields. 

However, the Reserve Bank would not be willing to take the risk of finding out if this would be true, so it would rather be overly cautious and conservative. 

Lings thinks that more interest rate cuts are still possible in 2025, but this window is likely to close later in the year. 

“There is still the prospect of interest rates being cut further, and I think the Reserve Bank will acknowledge that interest rates are still in restrictive territory,” Lings said. 

“But clearly, as we go further into the year, with inflation expected to rise in the second half of the year, the window to cut rates will systematically close.”