Recent economic insights from consultancy PwC suggest that South Africa may be at the end of its interest rate cycle, with a shift in focus toward rate cuts in the coming years. PwC’s August Economic Outlook report indicates that the South African Reserve Bank (SARB) could maintain current interest rates in its upcoming meetings, possibly paving the way for rate reductions in 2024.
This shift in sentiment is notable, considering the SARB’s previous series of rate hikes that began in November 2021. Initially, there was a three-to-two split among the Monetary Policy Committee (MPC) members in favor of the first hike, followed by a subsequent four-to-one split. However, in the latest July meeting, a three-to-two vote favored holding rates, sparking speculation about the future of the rate hike cycle.
SARB Governor Lesetja Kganyago’s recent statement, “Is this the end of the hiking cycle? No, it is not. It depends on the data and risks; that is what it boils down to,” left room for interpretation. PwC suggests that Kganyago may have been emphasizing the data-driven nature of interest rate decisions, implying that an end to rate hikes can only be confirmed in hindsight.
Crucially, improving economic indicators, including declining inflation, are seen as indicators that rates may have peaked alongside the inflation trend. PwC points to the real repo rate, which is expected to increase from -1.4% in 2022 to 2.7% in 2023 and 3.0% in 2024, as a key metric to watch. This projection aligns with the SARB’s view of a steady-state neutral real interest rate of 2.5%.
The next logical step in the interest rate cycle, according to PwC, is a potential reduction in the repo rate as inflation continues to abate. This would mark a significant shift, as the initial rate hikes were aimed at undoing the accommodative monetary policies implemented during the pandemic in 2020-2021.
Economists and fund managers have been optimistic about the possibility of rate cuts starting as early as mid-2024, contingent on favorable data and risk developments. While rates are not expected to return to pre-pandemic levels, PwC suggests that a reduction of two percentage points could be achieved by the end of 2025, bringing the repo rate to approximately 6.25%. Such a move could support household spending and contribute to economic recovery.
South Africa appears to be on the cusp of a significant shift in its interest rate policy, with the potential for rate cuts in the near future. This transition reflects a broader trend of improving economic conditions and declining inflation, which could provide much-needed support for the country’s economic recovery.
