The Reserve Bank has signalled that interest rates could stay high for longer, saying headline inflation would now come down to its 4.5% target only at the end of 2025, potentially delaying the first interest rate cut.
The Bank’s monetary policy committee (MPC) held the repo rate at 8.25% on Wednesday as expected, citing risks to food prices and to the rand exchange rate, as well as still high inflation expectations.
While it made only minimal changes to its inflation forecast, its tone was “decidedly more hawkish”, said Goldman Sachs economist Andrew Matheny.
The committee said: “We still see headline inflation heading back to 4.5%.
“However, given extra inflation pressure, headline now reaches the target midpoint only at the end of 2025, later than previously expected. As a result the policy rate in our baseline forecast also starts normalising later.”
The hawkish tone could feed into market expectations that now see the committee starting to cut rates as late as November. Market pricing has recently shifted to a November cut in response to the prospect that the US Federal Reserve will keep rates high for longer, weighing on emerging-market currencies including the rand.
However, many economists continue to predict earlier rate cuts, with several expecting the committee to start cutting at its September meeting and some still predicting a July cut.
“We continue to see the July MPC meeting as being live, possibly containing one or two votes for a 25 basis point (bps) repo rate cut. By the September meeting we expect this to become a majority view, marking the start of no more than a 100 bps easing cycle,” said RMB Morgan Stanley economist Andrea Masia.
While some believe the Bank will wait for the Fed before it starts cutting, governor Lesetja Kganyago said on Wednesday that the committee watched the Fed but did not follow it or other central banks in advanced economies. “We watch the Fed because the decisions of the Fed have got implications for the global economy. And that has some consequences for the SA economy. What the major central banks do, including the Fed, matters for global financial conditions ... but we do not follow the Fed basis point for basis point,” he said.
While other emerging markets such as Brazil and Mexico have started to cut rates, Kganyago said those countries tightened monetary policy long before SA did and their interest rates went way higher, which meant they were able to rein in inflation faster. In real inflation-adjusted terms, those Latin American economies now had real interest rates around 6%, whereas SA’s, though restrictive, were still at only 3.75%, he said.
The committee would start cutting only when it was confident that the trajectory of inflation was such that inflation would drop to the 4.5% midpoint of the target range and be sustained at that level.
The committee said that while inflation expectations had moderated, two-year ahead expectations were still in the top half of the target range.
“We have little margin to absorb shocks so long as expectations are high,” it said.
Kganyago said the high expectations of business people were a particular concern because they were the price setters in the economy.
“Either they don’t believe us [that we will bring inflation down], or they know something we don’t,” he said.
The Bank’s own forecasting model now predicts only two 25 bps cuts this year, compared with three at the time of the previous MPC meeting, though as always Kganyago emphasised that the model was only one input into the MPC’s decisions
The Bank raised its forecast for average headline inflation to 5.1% in 2024, up from January’s 5% forecast, but kept average forecasts unchanged for 2025 and 2026.
The committee said SA’s return to the inflation target had been slow. The most recent inflation numbers showed yet another delay on the way to its 4.5% objective. Core inflation had risen, driven by services inflation, which was now at its highest level since 2019. “This suggests that SA is joining the global trend of services, rather than goods, becoming a major source of inflation,” it said.
The Bank estimates load-shedding took 1.5 percentage points off GDP last year, but expects this to moderate to 0.6 percentage points this year and 0.2 in 2025.
Economic growth is expected to rise from last year’s 0.6% to 1.2% this year as electricity and port and rail problems subside. Growth is forecast to improve to 1.6% by 2026, though the committee noted these projections were still below SA’s long-run average of about 2%.
The MPC’s next meeting is scheduled for the week of SA’s elections. Kganyago said the schedule was announced in November and the Bank did not intend to change the date, with the decision to be announced on May 30 as planned.
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