Experts expect the Monetary Policy Committee (MPC) to hold interest rates next week, but persistent inflation risks mean some have pushed their first-rate cut expectations further back towards the end of the year.
South Africa’s Reserve Bank (SARB) will decide on its interest rate stance next week on Wednesday (27 March), with the bi-monthly meeting giving insight into the MPC’s inflation and interest rate expectations.
The SARB has long been clear about its inflation concerns, stating that it wants CPI inflation to reach 4.5% year-on-year and sustainably remain around this midpoint before cutting rates.
According to Investec chief economist Annabel Bishop, the bank continues to believe that the South African Reserve Bank will not cut its interest rate either this month or at its May MPC meeting, with July likely the first opportunity to do so.
This expectation aligns with the sentiments of Reserve Bank Governor Lesetja Kganyago, who told Bloomberg that interest rates are unlikely to change any time soon.
“The task of taming inflation is not yet done. Until that is done, I don’t see why there should be a change in the monetary stance,” said Kganyago.
“The inflation outlook is uncertain, and it’s been volatile. Until inflation stabilizes where we want it, at 4.5%, and is sustained there, we don’t see why we should change our monetary policy stance,” he said.
The governor listed food prices, geopolitical risks and their impact on global supply chains and energy markets as some of the upside risks to the inflation outlook.
He also said the bank won’t succumb to election pressures as the country prepares to vote on 29 May 2024.
Bishop added that international oil prices have climbed on strengthening global growth and upward revisions in economic growth forecasts from multilateral institutions, placing upward pressure on inflation measures.
Additionally, she noted domestic pressures are expected to worsen for food prices as the El Nino has intensified, bringing extreme heat and below-average rainfall to some areas. The lag between agricultural and retail food prices will delay the feed-through.
“This risks an interruption to the expected moderation in food price inflation in H1.24 and particularly higher price pressures over H2.24.
“Risks to the upside may come from the rand too for inflation, on delays in the advent of US rate cuts,” said Bishop.
Considering this, she added even July may not prove to be the month the SARB chooses to make its first interest rate cut in the expected interest rate cutting cycle for South Africa over H2.24 and 2025.
“Investec has already revised the inflation forecast for the year up slightly, to 4.7% year-on-year, given higher supply side pressures, with CPI inflation not seen dropping to 4.5% before the end of Q3.24 now,” she said.
