In the ever-evolving landscape of South Africa’s economic policies, the spotlight is on the potential trajectory of interest rates in 2024. The recent decision by the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) to maintain the repo rate at 8.25% has left many anticipating a change. While experts predict a decline in interest rates, the composition of the MPC could prioritize inflation over economic growth, setting the stage for a nuanced economic landscape.
As of the latest MPC meeting, the SARB opted to keep the repo rate steady, aligning with market expectations. The decision followed a period of inflation maintaining a position within the SARB’s targeted band of 3% to 6%. Notably, December saw inflation ease to 5.1%, down from 5.5% in November and 5.9% in October.
Despite the prevailing stability, economists caution against complacency, citing a potential shift in the MPC’s stance. The looming appointment of new MPC members, potentially of a hawkish inclination, introduces an element of uncertainty to the interest rate outlook. A hawkish stance typically seeks to maintain higher interest rates to combat inflation, potentially at the expense of economic growth.
Governor Lesetja Kganyago, recognized for his hawkish stance, is expected to play a pivotal role in the appointment of new MPC members. Speculation surrounds his endeavor to bring in like-minded individuals who share his commitment to inflation control. The search for suitable candidates may extend beyond replacing the departed Deputy Governor Kuben Naidoo, with the possibility of expanding the committee to eight members.
Currently, the MPC comprises six members, including David Fowkes, a former member of the Bank’s financial markets department. Kganyago has expressed the intent to appoint a seventh member to ensure an odd number on the committee, avoiding the need for his decisive tie-breaking vote.
Looking ahead, economists project a potential reduction in interest rates in either May or July 2024. Despite the optimism, concerns linger regarding the composition of the MPC and its impact on the central bank’s approach to monetary policy.
Nedbank economists anticipate a cautious approach, with the MPC maintaining a hawkish tone until inflation aligns with the preferred target of 4.5%. Factors such as a vulnerable rand and rising geopolitical tensions contribute to a ‘wait and see’ approach, delaying the initiation of the cutting cycle. The gradual deceleration of headline inflation towards 4.5% is expected as domestic demand weakens and global disinflation intensifies.
Nedbank projects a 25 basis points reduction in interest rates in May, with a cumulative 100 basis points cut expected throughout 2024. However, the timing of the first cut may be influenced by external factors, including the South African national elections, potential interest rate adjustments by the USA, and geopolitical tensions.
Bank of America (BofA) offers a similar outlook, suggesting that a challenging Q2 may impede a rate cut in May, with the first cut likely in July. While BofA anticipates a total of 125 basis points worth of cuts between 2024 and 2025, this pales in comparison to the substantial 475 basis points worth of cuts implemented since November 2021.
The intricate dance between inflation control and economic growth sets the stage for a dynamic period in South Africa’s monetary policy landscape. As the MPC undergoes potential transformations, the nation will closely watch how these changes shape the trajectory of interest rates and, subsequently, the broader economic outlook. Investors, businesses, and consumers alike remain on alert, navigating the delicate balance between stability and growth in the coming months.
