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With consumer price inflation for July dropping to a three-year low, the case for an interest rate cut in September is now cemented, say analysts.
The cooling off of inflation from 5,1 percent in June to 4,6 percent in July was even below the 4,8 percent median of 16 economists’ estimates in a Bloomberg survey.
There is broad consensus among market commentators that the South African Reserve Bank (Sarb) monetary policy committee will start lowering interest rates when it meets on 19 September, a day after the US Federal Reserve’s two-day meeting on 17 and 18 September.
It is anticipated that a (likely) rate cut in the US will clear the path for the Sarb to also start lowering domestic interest rates.
Inflation outlook
In South Africa, the lower fuel prices of the past three months and a firmer rand against the dollar have supported the easing of inflation.
“Headline pressures in South Africa have cooled considerably and bode well for inflation expectations,” Casey Sprake, investment analyst at Anchor, told Moneyweb.
Anchor expects inflation to decline for the remainder of 2024, potentially dipping below 4,5 percent.
“It might not be a linear process, and we could see blips on headline rates through the year.”
Goldman Sachs Group economist Andrew Matheny said in a note that the bank expects inflation in South Africa to average 4.5 percent this year, lowering to 3,4 percent next year.
This is significantly lower than previous estimates of 4,8 percent and 3,7 percent respectively.
According to Goldman Sachs, this could mean interest rates will likely be lowered by 25 basis points (bps) at each of the Sarb’s monetary policy meetings in September, November and January – followed by quarterly cuts until it reaches 6,5 percent.
Sprake, however, is of the view that the rate-cutting cycle will be shallower than expected. “We need to have realistic expectations. At the moment, markets are only pricing in a [total of] 125 basis points, but we believe 100 basis points [is] more realistic and [likely to happen] incrementally.
“We see the first rate cut in September and from there onward into the remainder of 2025 and even into 2026, depending on how things play out.”
She cautions that some unknowns and uncertainties need to be considered. “Geopolitical tensions, American elections … and in South Africa, there are still sticky components we need to be aware of, like food inflation and the oil price.”
Three of South Africa’s biggest banks – Nedbank, Standard Bank and Absa – have recently predicted that a rate cut cycle is imminent.
Toni Anderson, head of Standard Bank Home Services, says in a note that the bank forecasts the Sarb will begin cutting the repo rate this year, with the first cuts of 25 bps expected in September and November, followed by two further cuts in the first half of 2025.
Jason Quinn, Nedbank Group CEO, said at the bank’s results presentation on 6 August that the South African prime lending rate will likely decline by a cumulative 50 bps in 2024 to end the year at 11,25 percent.
Absa projects that the prime rate will likely fall to 10,75 percent by mid-2025 from its current 11,75 percent, and Momentum foresees a 25 bps cut to 8 percent at the September 2024 meeting, followed by three more cuts of 25 bps each by the middle of 2025.
Could the two-pot system derail the lower inflation trajectory?
The two-pot retirement reform, which comes into effect on 1 September, has raised concerns about a possible inflationary impact, says Sanisha Packirisamy, chief economist at Momentum Investments.
The new system means retirement fund members will see their funds divided into two components – a so-called savings pot consisting of one third of retirement savings and a retirement pot with two thirds. Members will have access to the savings pot once in a tax year. − Moneyweb
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