FINANCE

Massive interest rate headache for South Africa – BusinessTech

Inflation has become deeply rooted in parts of the South African economy, and the second-round effects are beginning to be felt. As a result, interest rates will remain higher for a much longer period than initially anticipated.

This is according to Stanlib’s chief economist, Kevin Lings, who explained that the South African economy is very weak, which would typically trigger interest rate cuts; however, numerous upside risks to inflation are currently preventing this.

While the country managed to avoid a technical recession at the end of 2023, the economy is stagnating.

Unemployment remains extremely high at over 30%. The government debt to GDP ratio now exceeds 75%, and the government’s debt servicing cost is more than 20% of total tax revenue.

However, Ling stated that good progress, albeit slow, has been made in implementing the government’s reform agenda, which should lead to increased economic activity. 

Despite the progress, persistent high inflation is expected to limit the reforms as it will lead to high interest rates and reduced demand.

South Africa’s inflation rate in 2023 averaged 5.9%, down from 6.9% in 2022 but up from 4.5% in 2021, 3.3% in 2020, and 4.1% in 2019.

The forecast for 2024 is an average inflation rate of 5.2%, which has been revised up from the previous expectation of 4.9% as of December 2023.

Lings stated that there are still potential risks for inflation to increase, such as the impact of higher electricity and water prices, the recent rise in oil prices, and the weakening rand.

Encouragingly, some of these risks are being offset by the already high interest rates and the slow economic activity, which makes it difficult for companies to pass on these cost hikes.

These mitigating factors might allow the Reserve Bank to consider lowering interest rates in the second half of 2024, but the rate cuts are likely to be delayed until the middle of the third quarter.

At its most recent monetary policy meeting towards the end of March 2024, the Reserve Bank decided to keep the repo rate unchanged at 8.25%.

It further highlighted that although interest rates are restrictive, service inflation has become more entrenched at a higher level, and inflation expectations remain relatively elevated.

Lings believes that interest rates will stay the same until well into the second half of 2024. However, a rate cut by the middle of Q3 2024 is possible, especially if the US continues to postpone its own rate-cutting cycle.

Despite Lings’ sentiments, the SARB and forward rate agreement (FRA) rates are more hawkish, predicting cuts could be pushed into 2025.

Some economists, like those at Nedbank, predict at least two interest rate cuts in 2024—a 25-basis-point reduction in September and another in November.

However, there are also projections emerging that the central bank will maintain the current interest rates for the rest of the year.

The Reserve Bank stated that the markets are now more in agreement with the central bank’s view that there is still uncertainty about the pace of disinflation.

They are now pricing in fewer rate cuts spread further out in time.

The SARB’s Monetary Policy Committee (MPC) will meet at the end of the month just after the election, with the prevailing view that it will be another hold on rates.


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