MPC’s caution expected
UNCHANGED REPO RATE: LIKELY TO EASE IN THE SECOND HALF OF 2024
If economy evolves as forecast, SA is at end of interest rate hiking cycle – expert.
The decision of the Monetary Policy Committee (MPC) to keep the repo rate unchanged at 8.25% during the January meeting came as no surprise for economists, as upside risks to the domestic inflation outlook, capital flow volatility and a weak currency imply the SA Reserve Bank (Sarb) does not have the luxury to implement early rate cuts.
Jee-A van der Linde, senior economist at Oxford Economics Africa, said the tone of the Sarb’s MPC suggests it is not in a hurry to lower rates amid upside risk to inflation, significant uncertainty about the upcoming elections and concerns about the fiscus.
“This year’s national elections present novel uncertainty, with the macroeconomic fundamentals weaker than before the [Covid] pandemic and amid widespread impediments to growth. Our baseline is that the ANC will remain in power, likely with the help of small coalition partners.”
However, he said, nervy investors will remain in the dark with an election date yet to be announced.
“The past two years have been a particularly trying period for South Africa, starting with impeachment calls against President Cyril Ramaphosa at the end of 2022, followed by the US accusing South Africa of supplying arms to Russia in early 2023.”
Heightened fears of a total electricity grid collapse, disappointing economic growth and South Africa’s deteriorating fiscal position have exacerbated the situation, culminating in a protracted period of domestic uncertainty.
In addition, increased geopolitical tumult amid tighter global financial conditions has raised the risk profile of economies like South Africa needing foreign capital, pushing borrowing costs up.
“We anticipate policy easing in the second half of the year will result in the benchmark rate reaching 7.75% by the end of the year.”
Prof Raymond Parsons, economist at North-West University Business School, said although the MPC is still cautious, positive economic data generates the real prospect that inflation is beginning to unwind.
“If the economy now evolves in line with forecasts, South Africa is at the end of the interest rate hiking cycle. Borrowing costs, although still in restrictive territory, could begin to slowly decline.”
Old Mutual Group chief economist Johann Els said an unchanged repo rate means the prime lending rate of commercial banks also remains unchanged at 11.75%.
“The decision was undoubtedly influenced by the rand plunging to its lowest point in three months [last week] after precious metals prices slid on reduced hopes of rapid interest rate cuts by major central banks, particularly the Sarb.”