SARB’s inflation targeting ‘scuppers’ chance of interest rate drop before end 2025
HIGH interest rates in South Africa could prevail for longer than initially anticipated, with the SA Reserve Bank (SARB) starting its cutting cycle only towards the end of 2025 as it becomes more aggressive on its inflation targeting.
This comes as consumers continue to grapple with an elevated cost of living and a heightened interest rate environment, while average take-home pay in real terms tracks lower.
The SARB is expected to keep interest rates unchanged at the meeting this month of its Monetary Policy Committee (MPC), as the recently published Monetary Policy Review gave a clear view of the central bank’s inflation and interest rate views.
The SARB has raised and left the repurchase rate (repo rate) unchanged at a 14-year high of 8.25% since May 2023, broadly consistent with persistent inflation, which remains at 5.3%, and the uncertain domestic and global outlook. The central bank foresees a slow drop off in its target inflation measure, with the consumer price index (CPI) inflation rate, over the course of this year and next, only reaching a midpoint of 4.5% year-onyear towards the end of 2025.
Investec chief economist Annabel Bishop on Friday said the SARB’s inflation outlook would be disastrous for borrowing costs as the bank considers inflation, in the main, for its monetary policy decisions.
“This forecast scuppers any chance of an interest rate cut this year, and makes one likely only towards the end
of 2025, if at all, as the SARB has said it will not cut SA’s interest rates until CPI inflation remains around 4.5% year-on-year,” Bishop said.
“While a better-than-expected CPI inflation outcome for this year is possible, and we currently have lower forecasts than the SARB on CPI, expecting it to reach 4.5% in the fourth quarter of 2024, and so a quicker cut, risks remain to this view.”
International oil prices – also an important factor for inflation outlook – retreated after moving above $90 a barrel for Brent crude, as the US interest rate cutting cycle has been delayed, weakening expectations for demand.
Analysts foresee a small fuel price cut building for next month, with rand strength key.
FNB senior economist Siphamandla Mkhwanazi said their recent analysis indicated the US economy was performing stronger than anticipated, with inflation remaining more persistent. This led FNB to believe the US Federal Reserve will keep interest rates higher for a longer period, with the first reduction potentially delayed from June to September this year.
“In SA, the Reserve Bank has signalled a potential shift towards a stricter inflation target of 3%; however, the exact timing of this change remains unclear,” Mkhwanazi said.
“This potentially means keeping interest rates higher for a longer period to achieve this new target and control inflation. As a result, we have adjusted our forecast for the repo rate, predicting a slower and delayed decrease with some potential downside risk in the medium to long term.”