MPC’s decision to keep repo rate unchanged no surprise – economists

The decision of the Monetary Policy Committee 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 that the Sarb does not have the luxury to implement early rate cuts.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the tone of the Monetary Policy Committee (MPC) of the Reserve Bank (Sarb) suggests that 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 country’s macroeconomic fundamentals weaker than before the 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.”

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Upcoming election creates uncertainty

However, he says, 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, which started 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 grid collapse, disappointing economic growth, together with 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 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.”

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Repo rate cuts only when inflation gets closer to 4.5%

Nedbank economists Liandra da Silva and Nicky Weimar were also not surprised by the MPC’s decision, given the clear moderation in price pressures since April 2023. “However, the MPC will maintain a hawkish tone until inflation edges closer to its preferred target of 4.5%.”

They believe that while many of the upside risks to the inflation outlook have dissipated since last year, those emanating from a vulnerable rand and rising geopolitical tensions will drive the Sarb to adopt a ‘‘wait and see’’ approach before commencing its cutting cycle.

“Our base case scenario is for the Sarb to cut interest rates by a cumulative 100 basis points throughout 2024, with an initial reduction of 25 basis points at the May meeting. Our forecast takes the repo rate to 7.25% and the prime lending rate to 10.75% by the end of the year.”

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SA could be at end of rate hiking cycle

Prof. Raymond Parsons, economist at the North-West University Business School, says although the MPC is still cautious, there is nonetheless positive economic data that generates the real prospect that inflation is beginning to unwind and may be less entrenched globally and in South Africa this year.

“The economic evidence indicates that, 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 later in 2024.”

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Decision not to change repo rate due to weak Rand

Old Mutual Group chief economist Johann Els, who also predicted that the policy repo rate would remain unchanged, marking the fourth consecutive meeting without a rate change, said this means that 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 earlier this week, after precious metals prices slid on reduced hopes of rapid interest rate cuts by major central banks, particularly the Sarb.”

Investec chief economist Annabel Bishop says the escalation in geopolitical tensions caused risk aversion in global financial markets to rise, weakening emerging market’s currencies and so the rand. This marks its lowest point since early October 2023, after ending the week at R19.01 to the greenback last Friday.

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When repo rate cuts come, it may be too late for many

Neil Roets, CEO of Debt Rescue, says that the protracted cycle of steep interest rates that has taken borrowing costs to their highest level in more than a decade has decimated the lives of South Africans.

“Consumers have turned to debt to either make their monthly payments or pay off existing debt. This kind of distressed debt is an indication of a nation in deep trouble, as it traps people in a vicious cycle of paying off their debt with more debt. My concern is that, when the rate cut finally comes, those who are credit-worthy will simply take on more debt, as the interest on their existing debt will drop. This is a very dangerous trend,” he warns.

Dr Andrew Golding, chief executive of the Pam Golding Property Group, says while there is little disagreement over the fact that interest rates have peaked and are ultimately headed lower this year, there is less certainty as to the timing and extent of those cuts.

“As the Governor of the Reserve Bank has clearly stated his intention to cement inflation expectations around the mid-point (4.5%) before taking his foot off the brake, local market expectations seem to be shifting to the first cut in rates materialising during the second half of the year.”

He also does not think South Africa is likely to start reducing the repo rate until the US Fed makes the first move, while initial optimism that the Fed could start cutting interest rates in March has faded with the first reduction expected in the second quarter—or later.