Ina Opperman

By Ina Opperman

Business Journalist


Inflation expectations delay repo rate cut, but it will come this year – economists

The Reserve Bank again unanimously decided to keep the repo rate unchanged at 8.25% during its March meeting for the fifth time.


Although inflation expectations are delaying a cut in the repo rate, economists are positive that interest rates will be cut later this year.

Jacques Nel, head of Africa Macro at Oxford Economics Africa, says the decision was widely expected. “We maintain our view that policy easing will commence in the second half of the year. We expect the repo rate to end 2024 at 7.75%.”

The slight uptick in inflation in February to 5.6% from 5.3% in January was largely driven by updated medical aid premiums and does not point towards a resurgence in price pressures, he says. However, inflation remains closer to the upper bound of the target range of 6.0% of the South African Reserve Bank (Sarb) than the mid-point of 4.5%) which means that the Monetary Policy Committee (MPC) remains uneasy.

Nel points out that the US Fed emphasised last week that it is not panicking due to recent upside inflation surprises, but indications are that the first policy rate cut will only take place in June and not in May, as expected.

“However, this does not change our outlook as Fed action would then still precede Sarb cuts. Furthermore, domestic monetary conditions remain restrictive at the moment and the latest consumer sentiment and retail figures suggest the demand side of the South African economy is adhering to monetary authorities’ guidance.”

ALSO READ: Repo rate remains unchanged as expected at 8.25%

El Niño could be the fly in the ointment for inflation

He says one salient source of upside inflationary risk is the extent to which adverse El Niño conditions are reflected in agricultural output and subsequently food prices. “Our forecast for inflation to average 5.2% in 2024 remains intact.”

Mokgatla Madisha, head of fixed income at Sanlam Investments, says investors and market analysts are cautionary but optimistic about a rate cut later this year.

“With the market now pricing a single rate cut for South Africa this year, we must remember that short rates offer a lot of value to investors. This is especially important ahead of the elections, while the market is trading very cautiously, which is warranted.”

The expected inflation trajectory and its convergence towards the midpoint of the target range lies at the heart of the Sarb’s decisions, Madisha says.

“Recent inflation data, while showing signs of moderation, remains above the desired threshold, necessitating caution. However, inflation has been trending lower from a peak of 7.8% in July 2022 to 5.6% in February 2024.”

ALSO READ: No repo rate respite yet – consumers paying almost 40% more on loans now than in 2020

Pressure on disposable income of consumers

Neil Roets, CEO of Debt Rescue says that, aside from the relentless cost-of-living increases, the pressure on the disposable income of working South Africans is the biggest red flag right now, as take-home pay fails to keep up with inflation.

“The only way to turn this around is to lower inflation which, in turn, will lower interest rates. Surely the plight of the country’s workers and their families should be foremost when making decisions that impact the population?  Especially as these are the very tax payers keeping the economy going.”

Dr Andrew Golding, chief executive of the Pam Golding Property group, says the Sarb’s announcement that the repo rate would remain unchanged at 8.25%, meaning that the prime rate holds steady at 11.75%, was disappointing for consumers with significant debt, including home loans.

“Although the resilience of the residential property market continues to shine through despite the current weak economy and financial pressures faced by consumers, with FNB and Pam Golding Properties’ own data reflecting that buying activity has trended higher in recent months, some respite in the form of a reduction in the interest rate would have gone a long way to bolster confidence and sentiment in the market.”

ALSO READ: Repo rate remains unchanged again at 8.25%

Mild cutting of repo rate expected in second half of 2024

John Loss, property sector strategist at FNB Commercial Property Finance, says FNB expects mild interest rate cutting to start in the second half of 2024. “The ongoing sideways movement in interest rates is expected to keep property values growing at very low single-digit rates, not keeping pace with general inflation, which translates into further correction in “real” (inflation-adjusted) values.”

He also points out that if the existing market is to move sideways at best, the new development market is likely to remain in the doldrums.

“With ample supply in existing property markets, with the exception perhaps of industrial property, it would require strengthening demand for existing properties to run for some time before there is sufficient lack of supply to trigger meaningful demand growth for newly built properties, and that environment appears some way off.”

ALSO READ: Repo rate stays unchanged at 8.25%

Repo rate caution with elections coming in May

Prof Raymond Parsons, economist at the North-West University Business School, says the Sarb remains highly cautious amid the combined uncertainties it sees generated by factors such as ‘sticky’ inflation, rand volatility, US interest rates and South Africa’s pending elections on 29 May.

“For the MPC, the timing of any easing in interest rates clearly remains directly linked to future inflation trends and a further reduction in inflationary expectations. The MPC’s message is that it will not start cutting rates until inflation visibly winds down and is entrenched at the mid-point (4.5%) of the Sarb’s inflation target range of 3%-6%.”

He says it now seems unlikely that the Sarb will begin to reduce interest rates until the second half of 2024.

“By then, it may be anticipated that, in general, the key inflation data will be more favourable and in particular that the outcome of the elections will also be known. And even if interest rates begin to ease in the latter half of 2024, the initial cut will probably be no more than 25 basis points.”

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