Interest rates are likely to remain unchanged, at best, with the repo rate steady at 8.25% at this week’s meeting of the Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) because inflation risks had escalated, economists said over the weekend.
“We expect the MPC to leave interest rates unchanged … as inflation’s descent towards the 4.5% target stalled over the past two months,” the Nedbank Group’s Economic Unit said in a note on Friday.
FNB’s economists concurred: “While we expect interest rates to remain unchanged, the messaging at that meeting remains key as many spectators of monetary policy around the globe seek indications of when interest rate cuts may be implemented.
“The middle of the year appears to be the expected turning point … However, with inflation still above target in much of the globe and trade fragmentation still the order of the day … risks remain tilted upwards.“
SARB governor Lesetja Kganyago has repeatedly said that the MPC wishes to see headline earnings inflation trend towards the 4.5% midpoint of the SARB’s 3% to 6% target range, in a consistent manner, before considering interest rate cuts.
“Clearly headline inflation is not there yet,” said Nedbank’s economists.
Instead, the MPC was likely to say inflation risks were trending higher because of geopolitical and adverse weather condition risks to energy and food prices, the rand’s vulnerability to fiscal risks in South Africa, the uncertain election outcomes and other rising domestic costs from load shedding, rising wage demands and structural economic impediments.
More positively, Nedbank said the rise in inflation in January and February was driven mainly by once-off increases in only a few sectors, as opposed to a more broad based increase in prices across the economy.
It said, however, that given that the US would only likely start easing its rates policy in June, and the local election uncertainty in May, Nedbank had shifted its forecast for the first cut in interest rates to July, starting with a 0.25 basis points reduction, followed by similar cuts in September and November.
Momentum’s Macro Research unit said last week: “We maintain our view that the SARB will likely keep interest rates constant at 8.25% at the March interest rate setting meeting.
“We acknowledge the increased risks to our long-standing view …these risks include the possibility of higher food inflation due to intensifying El Niño conditions, volatile and elevated inflation outcomes, still elevated inflation expectations and caution displayed by global central banks by keeping interest rates higher than the market had initially anticipated.”
Momentum said they expected the first move lower in South African interest rates increasingly more likely to only commence in the third quarter of 2024.
Meanwhile Casey Sprake, an investment analyst at Anchor Capital, expected interest rates to fall even later this year.
“Any possible interest rate cuts will likely only materialise towards the end of 2024 and depend on the inflation outlook (locally and abroad),” she said in a statement.
“We continue to view food prices as a key upside risk given the various ongoing supply shocks, particularly ahead of the forecast El Niño weather pattern and amid relatively large swings in crucial commodity prices and the rand exchange rate.
“Overall, risks to the inflation outlook have deteriorated - geopolitical tensions have worsened, and the deteriorating performance at our key ports adds uncertainty to the future inflation path,” Sprake said.
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