Inflationary pressures have subsided considerably in South Africa, leading economists to anticipate that the South African Reserve Bank (SARB) will keep its repo rate unchanged in its upcoming meeting on July 20. According to a recent Reuters poll conducted from July 6 to July 12, out of 21 economists, 12 predict that the SARB will maintain the repo rate at 8.25%, while the remaining nine economists expect a 25 basis points increase.
The SARB’s tightening measures over the past year, which have amounted to a cumulative 475 basis points since November 2021, are seen as sufficient by analysts, who believe that financial conditions have already tightened significantly.
The easing inflationary pressures, coupled with the anticipation that June 2023 inflation will likely fall within the SARB’s target range of 3% to 6% and July inflation could be below 5.0% due to base effects, provide little impetus for the central bank to raise interest rates further. Razia Khan, an analyst at Standard Chartered, suggested that as inflation approaches the midpoint of the target range, there is room for policy easing to prevent it from becoming overly restrictive.
The Reuters poll indicates that economists project a cumulative 75 basis points of rate cuts in the first three quarters of 2024, with the repo rate potentially reaching 7.50%. This trajectory aligns with the expectations that inflation will continue to moderate towards the midpoint of the target range.
For this year, economists forecast an average consumer inflation rate of 5.9%. Looking ahead, expectations suggest a further decline to 4.9% in 2024 and 4.4% in 2025.
Investors will also be monitoring the SARB’s consideration of the rand’s performance, as it serves as an indicator of imported inflation. South Africa’s power utility, Eskom, has faced challenges in transmitting electricity through the country’s aging grid, impacting the overall economic outlook. These factors will likely factor into the SARB’s decision-making process.
Dennis Shen, a senior director at Scope Ratings, cautioned that although headline inflation is declining, core inflation remains relatively high. This may make the SARB hesitant to halt its rate hikes prematurely, signaling the possibility of future rate increases.
Overall, with inflation expected to moderate and remain within the target range, the SARB’s decision to maintain the repo rate is seen as a positive signal for investors. The prospect of future rate cuts in 2024 provides potential opportunities for businesses and individuals to access more affordable credit, which could stimulate economic growth. However, investors should remain vigilant regarding core inflation and the SARB’s response, as it could influence the direction of interest rates in the coming months.
