Economists widely expect the South African Reserve Bank’s monetary policy committee to once again hold the interest rate at 8.25% when it concludes its meeting on Thursday.
Economists widely expect the South African Reserve Bank’s monetary policy committee (MPC) to once again hold the interest rate at 8.25% when it concludes its meeting on Thursday.
This comes on the back of sticky consumer inflation which was at 5.2% in May — according to the latest data from Statistics South Africa — still above the 4.5% midpoint of the Reserve Bank’s 3% to 6% inflation target range.
Economists at Nedbank believe inflation will trend lower for the remainder of the year, adding that conditions for a cut will probably be more favourable towards the end of the third quarter.
“Headline inflation is forecast to ease slightly from 5.2% in May to 5.1% in June, staying sticky but steady around 5% until September before drifting lower from October onwards, ending the year at 4.9%. The disinflation process will remain relatively slow,” they said in a note.
At its May meeting, the MPC upwardly revised its inflation forecast, saying it would probably reach the 4.5% midpoint in the second quarter of 2025.
Investec chief economist Annabel Bishop expects interest rates to stay unchanged on Thursday and for the consumer price index (CPI) to reach 4.5% by the third quarter of 2024.
“A better-than-expected CPI inflation outcome for this year, compared to the MPC projections is possible, and we have lower forecasts than the Sarb [South African Reserve Bank] on CPI, currently expecting it to reach 4.5% in Q3 in 2024,” she said.
“A quicker cut is possible for South Africa, and we continue to expect the first opportunity for an interest rate cut will be in November, but with the ongoing risk it could very well only occur in 2025 instead.”
The last MPC meeting took place one day after the 29 May elections. At the time, the central bank expressed concerns about elevated inflation expectations and the volatility of the local currency, which was vulnerable to political uncertainty.
But recent developments have eased concerns slightly, according to Nedbank.
“Although sentiment ebbed and flowed in response to every political development over the past two months, the markets generally welcomed the outcome of the general elections, the formation of the government of national unity, and the shape of President [Cyril] Ramaphosa’s new cabinet, valuing the cooperation of centrist political parties while pricing in policy continuity and the prospects of accelerated structural reforms,” the bank said in its note.
Investment management company Citadel had pencilled in rate cuts for this year despite the local political outcomes, portfolio manager Mike van der Westhuizen said.
“Globally, inflation has moderated nicely, and the path of least resistance is to cuts (easing has taken place already in a lot of emerging markets and more recently developed markets),” he said.
“With regard to government, the pretty seamless integration into a GNU [government of national unity] has given markets peace of mind, but it’s early days still. Optimists will say much has changed, realists will say that there is still much work to be done and much more clarity needed around actual policy and the implementation thereof.”
The more stable currency will help stabilise inflation to a “decent extent”, Van der Westhuizen said.
Investec’s Bishop said the stronger rand may lower South Africa’s inflation outcomes and its positive performance in July so far could drive a potential fuel price cut of about 10 cents a litre in August.
FNB economists said the local currency is on a path to recovery and “should entrench the South African Reserve Banks’ predictions that inflation will stabilise around the midpoint in the second quarter of 2025”.
Nedbank expects the first 25 basis point cut in September, followed by another of the same margin in November.
“The repo rate is forecast to end the year at 7.75%, taking the prime lending rate to 11.25%. Real interest rates will increase further, stabilising above 2% as inflation dips below 5% later this year and throughout next year,” the bank said.