Economists expect repo rate to stay unchanged

Economists expect the Reserve Bank’s Monetary Policy Committee will leave the repo rate unchanged on Thursday after they meet this week and that inflation will continue to moderate this year.

In the midst of the longest month of the year for consumers as they battle to make ends meet after spending more money than usual over December while also meeting the financial challenges of the new school year, many worry that interest rates will increase and add to their financial worries.

Statistics SA will announce the inflation rate for December on Wednesday and on Thursday the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) will announce the repo rate.

The MPC independently makes monetary policy to achieve the inflation target that is between 3 and 6%. Monetary policy is implemented by setting a short-term policy rate called the repo rate, which affects the borrowing costs of the financial sector which in turn affects the broader economy.

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No expectation that inflation will increase in December

Independent economist, Elize Kruger, says inflation is forecast to moderate to 5.2% in December thanks to lower fuel prices.

“Food prices are forecast to have remained sticky at 9.2% compared to 9.0% in November. Core inflation is forecast at 4.6%, a small uptick compared to 4.5% in November.”

The economists at the Nedbank Group Economic Unit say inflation eased slightly more than expected in November, receding to 5.5% after accelerating to 5.9% in October from 4.7% in June.

“We see inflation moderating to 5.2% in December, averaging 5.9% over the whole year. Core inflation will probably remain steady, forecast at around 4.4% in December, with seasonal spikes in some services offset by discounts among goods retailers.”

They still expect a gradual disinflationary trend in 2024, with headline inflation sticky above 5% for much of the year, before dipping more convincingly towards 4.5% from September onwards. The downward force is likely to come from fading global price pressures and weaker domestic demand, but the risk to our forecast remains tilted to the upside.

Lisette IJssel de Schepper, senior economist at the Bureau for Economic Research at Stellenbosch University, expects inflation to moderate further to 5.3% in December.

“Except for a temporary bump, driven by steep medical aid premium increases in early 2024, inflation is set to slow through the year but will likely only reach the midpoint of the Sarb inflation target towards fourth quarter of the year.”

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Inflation expected to fall to 5.2%

The elevation in South Africa’s inflation rate around the turn of the third quarter into the fourth quarter was temporary as expected, Annabel Bishop, chief economist at Investec, says. She expects inflation to fall to near 5.2% in December thanks to lower fuel prices and a stronger Rand.

Frank Blackmore, lead economist at KPMG, says although inflation has seen a reduction from the highs of July in 2022 to the current level of 5.5% in November, KPMG expects that trend to continue further through 2024.

“The reality is, there is still a lot of inflation or cost pressure within the economy. We know for instance, the latest values for food for are around 9%, but are expected to come down over the course of the year, while electricity will remain high at 15.2%, putting pressure on household and utilities.”

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Repo rate expected to remain unchanged

Kruger expects that the MPC will keep the repo rate unchanged despite a slight uptick in inflation expectations, the weak level of the Rand and headline inflation still running above 5% as well as other upside risks such as geopolitical risks and higher logistics costs. However, she does expect a hawkish tone from the governor.

“However, with average CPI inflation forecast at 5.2% in 2024, an unchanged monetary policy stance implies a punitive real interest rate of around 3%, which signals that interest rate cuts could be on the cards in the second half of the year, once global rates start to moderate, food prices moderate and the rand exchange rate strengthens somewhat.”

She forecasts 3 repo rate cuts of 25 basis points each during 2024, with the first cut at the May meeting.

The Nedbank economists also expect that the MPC will leave rates unchanged although headline inflation remains above the Sarb’s preferred target of 4.5%.

“Our base case scenario is for the Sarb to keep rates unchanged at its January meeting, followed by a cumulative cut of 100 basis points throughout 2024, with an initial reduction of 25 basis points at the May meeting.”

They forecast that the repo rate will decrease to 7.25% and the prime lending rate to 10.75% by the end of the year, but if the rand tumbles ahead of the elections and the US starts its monetary easing later than expected, interest rates will probably only be cut by 75 basis points over the year.

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Bar for rate cuts remains high

De Schepper says the BER expects the Sarb will keep the interest rate on hold in next week’s meeting. “Following the renewed uptick in inflation expectations, the statement may even reflect a slight hawkish tilt and signal that the bar for rate cuts remains high.”

For now, the BER expects to see the first interest rate cut in the third quarter of the year and De Schepper points out the governor of the Sarb, Lesetja Kganyago, said in a television interview this week that inflation remained more sticky than anticipated and that it would need to move closer to the target before monetary policy would be eased.

Bishop says January’s temporary lift will not necessitate higher interest rates and interest rate cuts are expected this year, although the MPC will most likely wait until inflation runs around or below 4.5%, which is only likely in the second half of the year.

“However, the Sarb may decide to cut interest rates ahead of time if it feels confident that its forecast has a high probability of inflation averaging at, or below, 4.5% in the second half of the year. No further interest rate hikes are expected.”

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No repo rate cuts for first half of the year

Blackmore says KPMG also expects the MPC to maintain current levels of interest rates well into the year before we see any decreases. “An additional factor in this regard will also be when international trading partners, such as the US and Europe, start decreasing their rates. If we prematurely start reducing our interest rates, there would basically be a knock-on-effect on the exchange rate as well as inflation further down the line.”

As such, he says, the expectation is for no interest rate reductions perhaps in the first half of this year although this will be data dependent and on what international shocks could influence inflation directly.