Analysts expect Reserve Bank to hold rates steady
The focus this week will be on the SA Reserve Bank’s monetary policy committee (MPC), which will on Thursday announce the first rate decision for the year.
The January Thomson Reuters Econometer poll shows that consensus is for the MPC to keep the repo rate unchanged. All 20 analysts who responded to the question expect the repo rate to be left at 8.25% for the fourth MPC meeting running.
FNB chief economist Mamello Matikinca-Ngwenya said there’s a general agreement that the hiking cycle ended at the May 2023 meeting, with the MPC saying that policy had become restrictive, even as it kept a relatively hawkish tone.
The Bank increased rates by 475 basis points (bps) from November 2021 to May 2023.
Bureau for Economic Research (BER) economists said that after the renewed uptick in inflation expectations, the MPC statement may reflect a slight hawkish tilt and signal that the bar for rate cuts remains high.
“For now, we expect to see the first interest rate cut in the third quarter of the year,” the BER said. “In a televised interview with Bank governor Lesetja Kganyago last week, he said that inflation has remained more sticky than anticipated and that it would need to move closer to the target before monetary policy would be eased.”
Independent economist Elize Kruger said the BER’s fourthquarter inflation expectations survey — the rand exchange rate at about R19/$ and the headline consumer price index (CPI) still running above 5% — will be justification for the MPC to keep the repo rate at 8.25%.
Nedbank chief economist Nicky Weimar said shrinking consumer spending and slowing credit growth suggest the Bank’s policy rates are restrictive enough.
“We still expect a gradual disinflationary trend in 2024, with headline inflation sticky above 5% for much of the year, before dipping more convincingly towards 4.5% from September,” Weimar said. Underlying price pressures measured by core inflation were 4.5%, holding relatively steady at the Bank’s target for the third month running, she said.
Absa bank senior economist Miyelani Maluleke said that beyond this week, the Reuters consensus is for a 25 bps easing in the second quarter and further easing for the rest of the year, leaving the repo rate at 7.5% by year-end.
But Absa expects “the easing to begin only in the second half. Analyst consensus sees further cuts in the following two years, taking the repo rate to 6.75% by the end of 2026,” Maluleke said.
Another important data release this week is Stats SA’s consumer inflation data for December on Wednesday.
Headline inflation shot above the Bank’s 3%-6% inflation target range in May 2022, peaking at 7.8% in July 2022 and remained above the upper end of the target for 13 months. It fell to 4.7% in July 2023, close to the Bank’s midpoint mark of 4.5%. This was short-lived, and a food- and fuel-driven acceleration drove it to 5.9% in October, before moderating to 5.5% in November.
The BER expects headline inflation to have slowed even further to 5.3% in December.
“This would leave average annual inflation at 5.9% for 2023,” BER economists said. “Except for a temporary bump driven by steep medical aid premium increases in early 2024, inflation is set to slow through the year,” they said.
FNB expects headline inflation in December to have fallen to 5.2%, with monthly pressure of 0.1% driven by food and core inflation but tempered by fuel price cuts.
Nedbank economist Crystal Huntley said though inflation proved sticky over the second half of 2023, Nedbank also believes inflation will have receded to 5.2% in December.
“In 2024, we expect inflation to be sticky just above 5% in the first eight months before moving closer to 4.5% over the year’s second half,” Huntley said.
She said inflation risks are still tilted to the upside, including the possibility of new supply shocks affecting key commodities. Internationally, the conflicts in Europe and the Middle East, and climate change, continue to pose upside risks to oil and food prices.
“On the domestic front, the threat of drier weather conditions, a volatile rand and potential adverse turns in domestic operating conditions caused by fragile infrastructure and service delivery cloud the outlook for food prices.”