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According to the most recent data from Statistics South Africa, inflation dipped to 4.6% year-on-year in July from 5.1% in June, reaching its lowest rate it has been since July 2021.
In July the central bank’s monetary policy committee (MPC), which meets once every two months to make a call on interest rates, predicted consumer inflation to be at 4.9% this year, a downward revision from its previous forecast of 5.1%. The bank said it was concerned about high interest rates globally, including the United States, adding that rates may stay higher for even longer than markets anticipated.
In a statement this week, Nedbank said most of the upside risks cited by the MPC at its July policy meeting have receded.
“The rand strengthened significantly over August and held up relatively well in early September,” it said.
“With the US Fed [United States Federal Reserve] announcing its pivot towards rate cuts and most other major central banks already in easing mode, it seems unlikely that the higher-for-longer narrative will unsettle global risk appetites in the months ahead.”
Investec economist Lara Hodes said inflation has eased globally, as well as domestically, and the Fed is widely projected to cut the interest rate this week — by 25 basis points’ according to Reuters — the first reduction in four years.
Stanlib economist Kevin Lings said now is a good time for the Reserve Bank to gradually cut interest rates; by 25 basis points in September and another 25 basis points in November, which would effectively reduce rates by half a percent this year.
“I think the Reserve Bank can adopt a gradual approach to rate reductions, and if they feel that it’s justified, then obviously they could at any point, accelerate that,” he said.
“They can carry on cutting at every meeting next year, with the aim of getting the interest rate down to the repo rate down to 7%. Given that the repo rate is 8.25%, that would give you 125 basis points of cuts, and you would then be at a kind of a neutral interest rate, and you would then be looking to keep rates on hold and judge whether you need to do more from that point.”
Many global economies have been cutting interest rates recently, and South Africa has been rather conservative in its approach, Lings said, noting how the central bank has kept the domestic rate at 8.25% since May 2023. With the Fed expected to cut on Wednesday, it eases the pressure on other countries.
“That will help the world economy with the current interest rate cutting cycle, and it makes it easier for everybody to continue their rate cutting process. I think it would certainly help South Africa,” Lings said.
Some analysts have long argued for a rate cut, given a lacklustre economy which grew by just 0.4% in the second quarter of 2024 — after being flat in the first — helped largely by improved electricity supply. Weak economic growth, coupled with a slightly stronger rand, justifies a rate cut, Lings said.
Nedbank said it expects inflation to stabilise just below the Reserve Bank’s 4.5% target over the next three years.
“Headline inflation is forecast to remain at 4.6% in August before cooling to end the year at around 4.1%. Altogether, we forecast inflation to average 4.8% in 2024, 4.3% in 2025 and 4.4% in 2026,” the bank said in a note.
It said it expected another 25 basis point rate cut in November in addition to the one predicted this week, taking the repo rate to 7.75% by the end of 2024. At this stage, a further 75 basis point reduction in 2025 is possible, Nedbank added.
Lings said that if the Reserve Bank cuts the rate further, consistently, this will boost consumer confidence and lift the economy.
“Interest rates work immediately. There are some positive effects, but the full effect is generally felt in 12 to 18 months, and that full effect is massively enhanced if you can follow it up with additional interest rate cuts.”
Article publié le mercredi 18 septembre 2024
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