Where to next for interest rates in SA?

The South African Reserve Bank (SARB) decided to keep interest rates on hold yesterday, with economists now predicting that rates will start getting cut from next year.

Despite two members of the SARB’s Monetary Policy Committee (MPC) voting to hike rates by 25 basis points, three members voted to keep them on hold. This kept the repo rate at 8.25 percent, with the prime lending rate at 11.75 percent.

Although headline inflation dropped dramatically over the last few months, SARB governor Lesetja Kganyago said that risks remain to the future outlook.

Consumer price inflation grew from 4.7 percent in July to 4.8 percent in August, with the SARB expressing concerns over fuel and food prices.

Although the bank dropped its headline inflation forecast for 2023 from 6 percent to 5.9 percent, it upped its duel price inflation forecast from -3.1 percent to 0.4 percent due to higher global oil prices and the weak rand.

The food price inflation forecast was also upped from 10.3 percent to 10.4 percent due to concerns about the drier conditions associated with the El Nino weather pattern.

“Overall, the SARB’s inflation forecasts indicate a continued moderation in price pressures. 

“However, it still considers the risks to the inflation outlook to be tilted to the upside due to tighter global oil markets, elevated domestic food prices, load-shedding and logistical constraints,” economists at Nedbank said.

Despite these concerns, Nedbank’s economists expect the headline inflation will likely trend close to the 4,5 percent midpoint from quarter 2024 due to slowing domestic demand. -Bloomberg

“Shrinking retail sales, slowing credit demand, and rising arrears on loans to households suggest that the MPC has done enough to ensure inflation’s return to the midpoint of the target range,” the economists said.

“Consequently, we forecast no further rate hikes for this year, followed by a 100-bps cut throughout 2024, taking the repo rate to 7.25% percent and the prime lending rate to 10.75 percent.”

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