There is an outside chance that the Reserve Bank’s monetary policy committee could cut interest rates when it meets this week, but the market consensus expects the Bank to hold steady yet again.
The rand has strengthened and inflation expectations have moderated since the committee met in the last week of May, in the shadow of SA’s general election, when it flagged “unusually elevated” uncertainty and still-high inflation expectations as reasons for its unanimous decision to hold rates.
Since then the rand has firmed to R17.95/$, compared with the Bank’s forecast starting point of R18.57/$ in May, on an election outcome that’s been viewed positively by the market. The latest Bureau for Economic Research survey shows average five-year inflation expectations have declined below 5% for the first time since 2021.
Slowing US inflation has also revived the prospect that the Federal Reserve will start cutting rates from September.
A cut would be SA’s first change in interest rates since the Bank implemented the last of a series of hikes in May 2023. The market consensus is that the Bank will keep the repo rate unchanged at 8.25%, with a first rate cut likely in September.
Nedbank’s economists predicted a holding pattern this week, with the Bank not changing its inflation forecasts much, even though some of the concerns it raised at the last meeting have not materialised.
But Goldman Sachs last week changed its prediction to an out-of-consensus 25 basis point (bps) cut to 8%, saying “lower political risk and a stronger currency provide a disinflationary environment that supports our case for a cut”.
Economist Andrew Matheny said fading supply shocks, declining inflation expectations and a global environment supportive of Fed rate cuts later this year should give the Bank more confidence that inflation would return sustainably to its 4.5% target.
FNB economist Mamello Matikinca-Ngwenya said in a note on Friday that the pending cutting cycle was “starting to come into view and the probability of an earlier start has increased”. But she warned that cutting ahead of the Fed could slow the recovery of the rand, especially given jitters about the stability of the government of national unity.
Governor Lesetja Kganyago and his deputies have made few, if any, public speeches or statements since the May meeting, making it difficult to gauge any changes in their thinking.
Kganyago repeated in the Bank’s annual report, published last month, that it was concerned that inflation was still stuck above 4.5% and it was important to rebuild confidence in its ability to attain its target.
SA’s official target is 3%-6% but the Bank has made the midpoint its effective target and has called for SA to reduce the target to levels closer to those of its emerging-market peers, most of which are about 3%.
Since the May meeting there have been rate cuts by several emerging-market central banks, and the European Central Bank has cut by 25 bps.
Economists expect, however, that global inflation and interest rates are unlikely to come down to the very low levels seen before the Covid crisis, because of high public debt levels and geopolitical tensions.
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