A new problem for interest rates in South Africa

South Africans have a tense wait ahead for the Reserve Bank’s Monetary Policy Committee (MPC) meeting in November – with the recent early resignation of SARB deputy governor Kuben Naidoo making the next move by the central bank even more uncertain.

Views on the final MPC meeting of the year are split among various analysts and economists, with many seeing another interest rate hike as likely as a hold.

The central bank’s monetary policy committee has raised interest rates by 475 basis points to 8.25% in its current tightening cycle that started in November 2021 and paused at its last two meetings.

While the MPC held rates at its last meeting in September, it was a close call, with three members voting to hold and two voting for another 25 basis point hike.

According to economists at the Bureau for Economic Research (BER), with Naidoo’s early resignation, the MPC now has four members – and while this is enough for a quorum, it increases the likelihood of a deadlock.

“The departure of a deputy governor means the SARB’s interest rate voting committee shrinks to four members. Although this is still a quorum, it does make the possibility of a deadlock on the MPC more likely, especially given that the last two policy interest rate calls to keep the repo rate unchanged were decided by a 3-2 split.

“In a 2-2 split scenario when there are only four members, SARB Governor Lesetja Kganyago would cast the deciding vote,” the BER said.

This presents a greater risk for another interest rate hike, as Kganyago is widely seen as a hawk (keenly focused on keeping inflation low) compared to Naidoo’s dove (which tends to support low interest rates and an expansionary monetary policy).

If it comes down to the governor having the final say, the scales might tip toward a hike.

Warnings abound

Warnings have already started seeping in that South Africans should start tempering expectations about future rates.

SARB deputy governor Fundi Tshazibana said last week there are still too many risks to the inflation outlook to declare that the cycle of interest rate increases is over.

“While many in the public domain are trying to get us to say the hiking cycle is over, as I said, there are too many risks on the horizon for us to pronounce on it,” she said.

Annual inflation has remained above the midpoint of the Reserve Bank’s target range of 3% to 6% — where it prefers to anchor expectations — since May 2021. It accelerated to 5.4% in September because of higher energy and food prices.

Meanwhile, surveys have shown that expectations for interest rates in the country among fund managers have also shifted.

While investors still believe that interest rates will be held at current levels, they do expect the anticipated cutting cycle to kick in much later – only coming after the second quarter of the year.

More positively, economists are at least certain that the cutting cycle will come, and when it does, the MPC is expected to cut at least 75 basis points in 2024.

The MPC will announce its next rate decision at its final meeting of the year scheduled for 21 to 23 November 2023.

Read: Reserve Bank Deputy Governor warns of possible interest rate hike