South Africa may experience a decrease in interest rates by September as inflation trends show signs of stabilisation. According to Statistics South Africa, the annual consumer price inflation rate was 5.2% in May, mirroring April's figure.
Inflation Trends and Economic Outlook
The data revealed stable annual rates for a third of the product groups, including food and non-alcoholic beverages. Despite recorded increases in sectors such as transport, alcoholic beverages, tobacco, recreation and culture, inflation rates for miscellaneous goods and services, communication, clothing and footwear, health, and restaurants and hotels saw a softening trend.
Koketso Mano, a senior economist at FNB, commented, “We expect headline inflation to continue its plateau in June. Although core inflation is likely to remain elevated due to new housing price pressures, this should be offset by deflation in fuel prices.” Mano also noted that food inflation is expected to rise in the second half of 2024 due to adverse weather conditions and higher soft commodity prices. Additionally, utility inflation is anticipated to contribute to overall inflationary pressures.
Despite these challenges, slowing global inflation, lower oil prices, a less depreciated rand, and subdued domestic demand are projected to support a decline in inflation rates heading into 2025. FNB forecasts headline inflation to average just above 5% for the year.
Potential for Interest Rate Cuts
Sanisha Packirisamy, an economist at Momentum Investments, predicts that the South African Reserve Bank (SARB) will maintain the current interest rates during the Monetary Policy Committee (MPC) meeting in July 2024. However, she anticipates a possible interest rate reduction in September 2024.
Packirisamy's forecast is based on several factors, including the expected moderation in inflation expectations, the continued strength of the rand, a faster-than-anticipated decline in food inflation, stable international oil prices, and the easing of interest rates by major global central banks. Nevertheless, she cautions that risks to this outlook include the sustainability of rand strength, geopolitical risks affecting international oil prices, and potential delays in interest rate cuts by the US Federal Reserve.
Investor confidence in an imminent rate cut is also reflected in options trading data reported by Bloomberg, with approximately 20% of investors predicting a 25 basis point cut during the SARB’s July meeting. Furthermore, there is unanimous anticipation of a 25 basis point cut in November, with over a 70% likelihood of a 50 basis point reduction.
Marek Raczko, a strategist at Barclays, expects the SARB to implement a total of 50 basis points worth of cuts this year, followed by an additional 50 basis points next year, citing falling inflation and improved risk sentiment toward the rand and South African assets.
Nedbank economists share this optimism, projecting a 25 basis point cut in September and another 25 basis point cut in November. Similarly, Investec's chief economist, Annabel Bishop, anticipates the start of the rate-cutting cycle in November.
While immediate financial pressures persist, the prospect of interest rate relief offers a glimmer of hope for South African households. As inflation trends moderate and economic conditions evolve, the expected cuts in interest rates could provide much-needed respite to consumers and businesses alike, fostering a more stable financial environment in the coming months.
BusinessTech. (2024, June 10). Interest rate relief for South Africa is coming. Retrieved from https://businesstech.co.za/news/finance/777802/interest-rate-relief-for-south-africa-is-coming-2/ [Accessed 11 Jun. 2024].
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