Interest rate relief is coming for South Africa
South Africa could see interest rates drop in September as inflation starts moderating.
According to Stats SA, annual consumer price inflation was 5.2% in May, unchanged from April.
Prices for some products, such as food and non-alcoholic drinks, remained unchanged from April to May. One-third of the products showed this pattern.
Inflation was lower for miscellaneous goods and services, communication, clothing and footwear, health, and restaurants and hotels. However, there were increases in inflation for transport, alcoholic beverages and tobacco, and recreation and culture.
We should see headline inflation continue its plateau in June. Monthly pressure is expected to stay low. Core inflation may rise due to housing prices, but this will be offset by lower fuel prices.
Food prices are expected to increase in 2024 due to bad weather and higher prices for agricultural products. Furthermore, inflation in utilities is also expected to exacerbate inflationary pressures.
However, a deceleration in worldwide inflation, lower oil costs, a less devalued rand, and restrained local demand are expected to contribute to a slowdown in inflation as we approach 2025.
It is expected that headline inflation will average just above 5% this year.
Interest Rate Cuts
The South African Reserve Bank (SARB) will likely keep interest rates unchanged when the Monetary Policy Committee (MPC) meets in July 2024.
A possible interest rate cut is expected in September 2024.
The forecast is influenced by several factors such as the probable decrease in inflation expectations, the anticipated reduction in overall inflation, the continuous strength of the rand, a quicker than expected decrease in food inflation, fairly stable global oil prices, and interest rate reductions by some of the world's leading central banks.
Risks to the forecast include the sustainability of rand strength, international oil prices given geopolitical risks and delayed interest rate cuts from the United States (US) Federal Reserve (Fed).
According to Bloomberg, options trading indicates that investors believe there will be a rate cut soon. About 20% of investors are expecting a 25 basis point rate cut at the SARB's July meeting.
It is very likely that there will be a 25 basis point cut in November. Additionally, there is a good chance of a 50 basis point cut.
We anticipate that SARB will reduce interest rates by 50 basis points this year and another 50 basis points next year. This is due to lower inflation and improved confidence in the ZAR and South African assets.
Nedbank economists are hopeful for interest rate cuts starting in September. They predict a 25 basis point cut in September and another in November.
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