Borrowers hoping for some reprieve this year could be left disappointed, with markets now expecting interest rates to remain unchanged in 2024.
Borrowers hoping for some reprieve this year could be left disappointed, with markets now expecting interest rates to remain unchanged in 2024.
The factors postponing the long-awaited interest rate cut were laid bare in the South African Reserve Bank’s monetary policy review, released on Tuesday.
The country’s repo rate stands at a 15-year high of 8.25% — the loftiest level in any election season since 2009, when the ANC’s vote share first started slipping. The Reserve Bank’s monetary policy committee (MPC) will announce its next interest rate decision on 30 May, the day after the general elections.
Although price pressures have recently shown signs of easing, the monetary policy review suggests that the path of disinflation is now less certain.
“Amid setbacks in recent domestic inflation outcomes, along with heightened uncertainty about global disinflation owing to stickiness in services inflation, markets now expect South Africa’s policy rate to remain unchanged this year,” it reads.
In the wake of uncertainty, the review states that a degree of caution needs to be applied to rate decisions, something that is highlighted by the guidance by the quarterly projection model, used by the bank for forecasting.
According to the review, the November 2023 and January 2024 MPC forecasts suggested rate cuts to commence in the first quarter of this year. The March 2024 forecast, however, suggested rate cuts would only begin in the May MPC meeting.
“Had the MPC adjusted rates in line with the earlier more benign inflation forecasts … inflation expectations could have worsened materially, delaying the path back to target and requiring higher rates again,” it notes.
Meanwhile, forecasts suggest inflation will only fall to the midpoint of the Reserve Bank’s 3% to 6% target range in 2025, as price pressures continue to materialise. The MPC will probably want to see inflation anchored sustainably towards the midpoint before it moves on interest rates.
Importantly, the United States Federal Reserve, which sets the tone for South Africa’s monetary policy, has signalled that interest rates stateside could remain higher for longer. The Fed’s hawkishness has caused markets to push out their expectations for interest rate cuts, a fact which has weighed on the already weak rand.
Recently-released minutes from the March federal open market committee meeting noted that participants were concerned that geopolitical tensions could escalate, adding to price pressures.
The International Monetary Fund’s global financial stability report also flagged this scenario, noting: “Sudden shifts in policies, a flare-up of geopolitical tensions, and commodity and supply chain disruptions are a few examples of catalysts that could usurp current expectations of the trajectory of inflation and, in turn, monetary policy.”
Domestic developments have also added to the rand’s weakness, which has a direct bearing on inflation and thus monetary policy.
Risk aversion is particularly high ahead of the general elections, as polls suggest that the ANC could lose the majority vote — opening up the possibility of a coalition between the governing party and market pariahs, the Economic Freedom Fighters (EFF).
In a research note released late last week, Investec chief economist Annabel Bishop noted: “The radical, nationalisation policies of the EFF have been negatively received by investors, weakening the rand and adding a risk premium to the bond market … The outcome of the end-May election is uncertain for parties and coalitions, elevating investor uncertainty.”