South African Reserve Bank to Initiate Easing Cycle Early Next Year

By Vuyani Ndaba

JOHANNESBURG – The South African Reserve Bank is expected to maintain its repo rate this year before beginning a rate-cutting cycle in early 2024, reducing rates by 25 basis points each quarter as inflation approaches its target range, according to a Reuters poll.

Should this scenario unfold, South Africa’s Reserve Bank would align with several emerging market central banks that have already initiated rate cuts or are planning to do so, having tightened rates to combat inflation sooner than many developed countries.

In a recent survey, 17 out of 20 economists projected that the repo rate would remain steady at 8.25% in the upcoming meeting, with 16 anticipating no adjustments in November as well. Two economists foreseen a potential increase of 25 basis points in September, while one suggested a 50 basis point rise.

Nevertheless, the findings indicate that the SARB may begin lowering rates by 25 basis points as early as January or March, with further cuts expected each subsequent quarter throughout next year.

Investec’s chief economist, Annabel Bishop, noted that a rate reduction is anticipated for the United States next year, and the SARB may follow suit, likely starting in the first quarter of 2024. She highlighted that decreasing inflation along with potentially stable or lower interest rates would positively impact households. However, there are risks relating to food prices, which could be affected by climate change and El Nino conditions.

Another poll indicated that the U.S. Federal Reserve is likely finished with rate hikes, with a majority of economists expecting the central bank to maintain rates at least until the end of March before making any cuts.

In South Africa, inflation is projected to decrease further in the coming months, averaging 4.9% next year compared to 5.9% this year, and declining to 4.6% by 2025. The Reserve Bank aims to keep inflation within a 3% to 6% range.

Economic growth is forecasted to be 0.3% this year and rise to 1.2% in 2024.

Hugo Pienaar, chief economist at the Bureau for Economic Research, commented on the growth prospects for 2024, stating that lower interest rates and inflation could help, but he believes the primary catalyst for enhanced growth will be an increase in private sector fixed investment, particularly in green energy projects.

Growth has been constrained by state power utility Eskom’s challenges in providing consistent electricity, amid a gradual shift to alternative energy sources like solar and wind.

Eskom faces significant debt and struggles to balance the need for routine maintenance with investments in its aging coal-fired power plants, further complicating the power crisis.