The “most reasonable projection” of how SA’s central bank expects macroeconomic factors to unfold during the rest of 2024 is generally supportive of the SA Reserve Bank initiating interest rate cuts in the second half of the year.
But much will depend on the outcome of coalition talks under way after the ANC lost its outright majority in the May 29 ballot, and how markets react once details of the structure of a proposed government of national unity become known.
“Right now, we’re sitting on one of the major inflection points in SA history and conditions are extremely unsettled,” said David Fowkes, a member of the monetary policy committee (MPC) and adviser to the Reserve Bank governors.
If markets reacted well to a newly formed government for SA, supporting the rand, and if other economic conditions were supportive, the Bank could implement rate cuts adding up to about 100 basis points (bps) during the second half of this year and 2025, Fowkes said.
“These weeks [after the election] are going to mean so much for SA ... financial markets are extremely skittish about the different things that could come out of the coalition talks,” he said.
“We may go into the next MPC meeting with a lot more good news under our belts, but we can also go into it with more challenging circumstances.”
Fowkes, who was speaking at the Agricultural Business Chamber of SA congress last week, said global interest rates remaining higher for longer and an “extremely strong US dollar” had pushed back expectations for the Reserve Bank to start its rate-cutting cycle.
At the start of the year there was optimism in global financial markets that central banks would announce several interest rate cuts in 2024. However, these expectations collapsed early in the year.
The initial outlook that the US Federal Reserve, the Bank of England and the European Central Bank (ECB) would implement six or seven rate cuts this year has shifted, with broad expectations now favouring one or two cuts this year, while some expect no cuts in 2024.
One of the factors giving central bankers pause was inflation rates, which appear to be stuck just above target.
“Inflation has come down quite a lot ... the bad news is, it’s getting stuck a bit above [central bank] targets, particularly in the US ... and there’s a lot of concern that inflation is going to get stuck above target,” Fowkes said.
The ECB and Canada did implement rate cuts last week, with the ECB lowering three key interest rates by 25bps.
However, it is unlikely that the Federal Reserve will start its rate-cutting cycle in June. Markets expect the first cut in September.
In May, the MPC kept SA’s policy rate at its 14-year high of 8.25%, where it has been since May 2023.
However, in its May statement, it said there had been an improvement in the inflation outlook since its March forecast, with inflation now expected to reach its midpoint objective of 4.5% earlier — in the second quarter of 2025.
Previously, the forecast had projected this milestone to be achieved by the end of 2025.
More balanced
“We’re not going to get carried away with this projection. But our best estimate at the moment is that we’re only a few quarters away from getting inflation back to target,” Fowkes said.
“For the first time since 2021, we think the [upside and downside] risks [to the outlook] are more broadly balanced.
“We can definitely think of some scenarios where things go worse, but we can also think of some scenarios where things go better.”
However, he said, that given the expectations for inflation’s behaviour, the Reserve Bank’s forecast saw room for rates to be cut by between 75bps and 100bps between the second half of the year and into early next year.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.