A better-than-expected print for headline inflation in July increases the likelihood that South Africa’s interest rate hike cycle has ended and the next move for the Reserve Bank will be to cut rates.
Stats SA published the latest consumer price inflation figures for July showing that headline CPI dropped to 4.7% for the month, much lower than the 5.3% recorded in May and well below market expectations of around 5.0%.
The lower figure puts CPI in the middle of the South African Reserve Bank’s (SARB’s) target range of 3% to 6%, and marks the fourth month of disinflation since March 2023 and the lowest point in two years.
Since the SARB’s Monetary Policy Committee (MPC) started the rate hike cycle in November 2021, the central bank has maintained that interest rates would continue to rise as long as inflation remained high – only a sustained trend downwards in CPI would shift policy in this regard.
This means that the downward trajectory of inflation seen this year spells good news for interest rates, and is likely to deliver another hold at the September meeting.
This position aligns with market consensus among fund managers and economists in new polls run this past week.
Bank of America’s (BofA) latest Fund Manager Survey shows that investors are confident that the South African Reserve Bank won’t hike rates again, with 80% of managers anticipating the next move from the SARB to be downwards, with consensus pointing to the first quarter of 2024 as the cut.
In a Reuters poll of 20 economists conducted in the past week, 17 respondents predict that the repo rate will be kept steady at 8.25% at September’s meeting, with 16 seeing no change again in November.
While some economists remain doubtful that a hold will last – anticipating another 25-50 basis point hike – they remain in the vast minority.
Most economists also agree that the Reserve Bank will start cutting rates, with a cut of 25 basis points anticipated as early as January or March, and again every subsequent quarter of 2024.
Investec chief economist Annabel Bishop, who called a hold ahead of the July MPC meeting, said the United States is expected to cut interest rates next year and the SARB is expected to do the same.
Easing inflation, and potentially flat to lower interest rates next year would be a positive for households, she said, but warned that upside risks remain – particularly around food prices and the impact of changing climate conditions due to the El Nino.
While headline CPI has come down, food inflation has remained fairly high, at 9.9% in July. This is down from 11.0% in June, however.
