As was widely expected, the monetary policy committee (MPC) of the Reserve Bank has kept the repo rate steady at 8.25% for a seventh consecutive meeting, warning again that “the battle against inflation is not yet won”.
Still, a more positive outlook that inflation will ease more quickly than previously expected has raised expectations that the Bank could start cutting rates at its next meeting in September.
In his speech on Thursday, governor Lesetja Kganyago said four members of the committee preferred an unchanged stance and two preferred a reduction of 25 basis points.
“In discussing the stance, MPC members agreed that restrictive policy remains appropriate to stabilise inflation at 4.5%,” Kganyago said.
He said SA’s inflation outlook had improved and the Bank now expected inflation to return to the midpoint of its 3%-6% target band in the fourth quarter of 2024, after previously forecasting price increases would dip below 4.5% only by the second quarter of 2025.
Headline consumer price inflation for 2024 is now projected at 4.9%, compared with the 5.1% forecast at the previous meeting.
Isaah Mhlanga, chief economist for RMB, said it was encouraging that two of the six members of the MPC preferred a cut. “This suggests we are moving closer to a rate cut,” he said.
RMB, however, still expects rate cuts to commence with a 25-basis point reduction in November.
The Bureau for Economic Research (BER) said in a note the latest statement from the MPC would probably firm up expectations for a September cut. The BER had long held the view that the first interest rate cut would come in July, but shifted this out to September during its April forecast update.
Standard Chartered Bank said markets would use the split vote by the MPC to rapidly price in a greater chance of a September rate cut.
“We are less certain. Given geopolitical risks, the US election and its broader implications for emerging markets we still lean to a first cut in November,” said Razia Khan, Standard Chartered chief economist for Africa and the Middle East.
Kganyago said that while the forecast had improved, the balance of risks was assessed to the upside, prompting the decision to hold off on a rate cut.
Before the Bank could initiate a cutting cycle the MPC would “need to be comfortable and see a couple of inflation prints that tell us we are on the right trajectory and that the risks we have identified get tilted not to the upside, but more towards the downside”, he said.
Kganyago said the MPC had previously identified that higher food prices could pose a risk to inflation down the line despite recent disinflation in the category.
“It seems to be very much a rand story, because if you look at the dollar price, the price of foods such as cereals is up, and when you see the rand price it has come down,” he said.
“The tight global financial conditions and the higher for longer [scenario] could result in a realignment of exchange rates and the rand is no exception. This means there are risks to the exchange rate and if they materialise, and the dollar price of food continues to climb, local food prices can turn.”
Kganyago said that inflation worldwide was declining slower than policymakers in advanced economies had hoped for, creating a situation where global prices have remained elevated when there are also exchange rate risks. “Together this could raise the inflation risk profile.”
The repo rate was last adjusted in May 2023, when the Bank raised the rate by 50 basis points (bps) to a 15-year high of 8.25%. Borrowing costs have surged 475 bps since November 2021, putting pressure on indebted South Africans and the economy.
Benay Sager, executive head of DebtBusters, one of SA’s largest debt management companies, said it was widely expected that the interest rate would be held steady, but it was still disappointing news for consumers. Consumers with a typical home loan now need about R4,000 extra when compared with 2020/21, he said.
Some of the international risks highlighted by Kganyago include global interest rates, which have remained high, especially in the US, signalling that rates may stay higher for even longer than markets anticipate and presenting risks to the currency outlook.
So far this year, policy rates have been lowered in Canada, Switzerland and the euro area, but remain unchanged in the US, the UK and Japan. Markets expect the US Federal Reserve will cut rates in September.
On the local front, Kganyago said SA’s economic performance in the first half of the year was disappointing after GDP contracted 0.1% in the first quarter.
“Recent data, including last week’s mining and manufacturing numbers, have caused us to trim our second-quarter growth estimate modestly, to 0.6%,” he said.
The Bank has revised down its GDP growth forecast for 2024 to 1.1% from 1.2%.
The rand firmed by about 0.25% on Thursday to R18.15/$.
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.