The South African Reserve Bank (SARB) has effectively closed the door to cutting interest rates any time soon until the consumer headline inflation dips to the midpoint of the target range.
The SARB’s Monetary Policy Committee (MPC), at its first meeting of 2024 yesterday, left interest rates unchanged leaving the repurchase rate (repo rate) and prime lending rates at 8.25% and 11.75%, respectively.
The decision was unanimous for a second meeting in a row, suggesting that all members were confident that interest rates were restrictive enough.
The cost of borrowing in South Africa has been kept at elevated levels since the last interest rates cut in May 2023 as inflation remained stubbornly high for the remainder of last year. Annual consumer price inflation pulled back in December, easing to 5.1% from 5.5% in November and 5.9% in October, while the average inflation rate for the year was 6.0%, lower than 6.9% recorded in 2022.
However, the MPC still assessed the risks to the inflation outlook as tilted to the upside due several domestic and global risks, but the risks to the medium-term growth outlook were assessed to be balanced.
The MPC adjusts interest rates accordingly as it wants inflation to be anchored to the 4.5% midpoint rather than the upper limit of its 3–6% target range.
SARB Governor Lesetja Kganyago yesterday said headline inflation for 2024 was expected to ease to 5.0%, with few significant changes to the forecasts for underlying components.
Kganyago, however, reiterated that permanently lower inflation and interest rates required inflation expectations to be closely anchored to the midpoint of the target band.
“We are an inflation targeter, a flexible one. There is no discernible trend that shows that inflation is declining towards our target. And so, for as long as there isn't any sustained decline of inflation towards our target and more importantly that inflation stays there in a sustained manner, don't expect us to recalibrate [monetary] policy,” Kganyago said.
“Focus on what the anchor of policy is, and the anchor of policy is inflation. It’s only when we are convinced that inflation has declined to target and is sustained there, that it will become necessary to recalibrate.”
The rand recovered slightly relative to the previous MPC meeting, with the SARB's implied starting point for the rand at R18.65 per dollar from R18.69 at the previous meeting.
FNB Chief Economist Mamello Matikinca-Ngwenya said the rates decision provided further conviction that the hiking cycle was behind the SARB, given that policy was already restrictive and underlying demand was weak.
Matikinca-Ngwenya said the current consensus prediction was for the cutting cycle to start in the second quarter of 2024, but the MPC would be cautious as event risk remains high.
She said the risks included the upcoming elections and any worsening in risk sentiment as well as exchange rate pressure that is associated with that event.
“Therefore, our view is that the first cut could be in the second half of 2024. That said, the MPC still requires more evidence that inflation will anchor at the 4.5% target within the policy horizon,” Matikinca-Ngwenya said.
“Unfortunately, heightened geopolitical tensions, biosecurity as well as adverse weather patterns complicate the disinflation trend and could prolong the lift in inflation expectations away from target. This supports the broad expectation that the cutting cycle will be shallow and real interest rates should remain higher than the pre-pandemic period.”
Meanwhile, the SARB revised South Africa’s economic growth forecast for 2023 to 0.6%, down 0.8% forecast in November, while the forecast for 2024 and 2025 remained unchanged at 1.2% and 1.3%, respectively.
North West University Business School economist Professor Raymond Parsons said it was inevitable that the MPC had to slightly reduce its gross domestic product growth forecast for 2023, but the 2024 forecast may be a little on the optimistic side.
Parsons said a worrisome recent negative signal on the economic activity front was the November 2023 contraction of -0.4% in the SARB’s composite leading business cycle indicator, for the first time since May 2023.
“The modest growth outlook again emphasises the extent to which growth-orientated policies and projects, such as resolving the transport and energy bottlenecks, still need to be urgently implemented to achieve higher job-rich growth rates,” Parsons said.
“These priorities remain imperative if South Africa is to ensure that the tailwinds will prevail over the headwinds in shaping the country’s economic performance in 2024.”
BUSINESS REPORT