Interest rate relief back on the menu for South Africa

With consumer price inflation (CPI) easing faster than anticipated in May, South Africa could finally see an end to the interest rate hike cycle, says Investec chief economist Annabel Bishop.

Commenting on the latest inflation figures, Bishop noted that the headline rate of 6.3% came in lower than market expectations of about 6.5%.

This points to inflation easing faster than previously expected and puts pricing on track to reach the mid-level of the South African Reserve Bank’s 3% to 6% range in 2024.

While inflation is currently expected to average 6% in 2023, Bishop said quicker disinflation in the coming months could see that pull below that level to around 5.7%.

Inflation in May tracked lower despite an increase in petrol prices. Fuel prices came down by a sizeable 74 cents per litre in June, likely leading to a good CPI print for that month. Fuel prices are also currently on track for a small cut in July, Bishop said.

“The Reserve Bank is likely to be happy with the drop in the CPI inflation rate, but cautious as the core inflation rate ticked up to 5.4% y/y,” she said.

Core inflation – which excludes food and fuel – recorded a slight broadening of price pressures, the economist noted, which points to some fundamental inflationary pressure. However, as the Reserve Bank targets headline inflation, this is unlikely to weigh too significantly on the SARB’s policy decisions, she said.

Adding to the positive outlook is that the rand has also pulled back from R20.00/USD earlier this month, to around R18.30/USD, gaining somewhat on the better-than-expected CPI inflation data.

Bishop noted that with the implied point in the SARB’s model of R18.68/USD, and a lower rand exchange rate now, “gains in the US dollar will likely be positive for the SARB’s inflation forecast too, and so for its monetary policy decisions”.

Given this positive data, Bishop said that Investec’s baseline is that the Reserve Bank will hold rates when it meets next in July, and will likely keep the hold until it starts cutting at the end of the year or early next year.

“Looking forward, South Africa’s financial markets, as indicated by the Forward Rate Agreement
curve, have factored in one more 25bp hike in the current interest rate cycle – at year-end – but we think
this is currently unlikely, and that SA has reached its terminal interest rate in the current cycle,” she said.

“The curve also indicated the likelihood of a 25bp cut in SA’s repo rate by the end of next year, if not
only in 2025, but this is likely to occur earlier to prevent SA’s monetary policy from becoming restrictive
as inflation falls towards 4.5% y/y.”

While Investec holds a more bullish view, other economists are not as optimistic.

Economists at Nedbank said that the CPI print would likely not be enough to convince the Reserve Bank to hold rates just yet, with the bank projecting one more 25bp hike in July.

“Given the many uncertainties surrounding the inflation outlook, especially the rand’s murky prospects amid persistent geopolitical risks and the US Federal Reserve’s hints of further rate hikes, the Reserve Bank will likely remain hawkish. We still expect one more rate hike of 25 bps in July,” the bank said.

The Reserve Bank has hiked rates by 475 basis points since November 2021 in ten consecutive meetings.

Read: Good news for households in South Africa as inflation eases more than expected