Big shift in interest rate expectations for South Africa in 2024

The South African Reserve Bank’s Monetary Policy Committee (MPC) is widely anticipated to maintain the repo rate at 8.25% on Thursday, aligning with similar decisions by banks like the FOMC in the United States. Despite initial expectations of rate cuts in the second quarter, projections have now been postponed, with Investec predicting the first cut, around 25 basis points, in the third quarter of the year. The prevailing narrative of “higher for longer” underscores the belief that the hike cycle has concluded, but persistent inflationary pressures suggest that interest rates will remain at current levels for a more extended period than initially anticipated.

Changing expectations regarding the initiation of the cutting cycle have resulted from various factors, with economists initially anticipating a cut in early 2024, then shifting to mid-2024, and now further postponing to the end of 2024. Concerns primarily revolve around inflation, fueled by inclement weather affecting food inflation and geopolitical events, particularly in the Middle East, disrupting oil trade and influencing fuel and transport inflation.

Reserve Bank governor Lesetja Kganyago has maintained a hawkish stance, emphasizing that rate cuts will not occur until inflation is consistently at lower levels. Investec economist Lara Hodes noted that while CPI inflation may rise to around 5.8% y/y in January, the long-term expectation is for inflation to eventually stabilize around 4.5% on an annual basis. Upcoming inflation figures from Stats SA, to be published on Wednesday, will shed light on the current scenario.

While December’s petrol price cut alleviated inflationary pressure, a potential hike in February, as indicated by the CEF data, poses new challenges. Supportive data from the producer price index (PPI), expected to have decelerated to 4.2% in December, adds complexity to the inflation outlook. These shifting economic dynamics are impacting the rand, which opened the week trading above R19 to the dollar, experiencing fluctuations before settling at R19.13 against the dollar. The uncertainty surrounding inflation and rate adjustments continues to influence currency market dynamics.

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