Reserve Bank expected to keep repo rate unchanged on Thursday

Economists expect the South African Reserve Bank (Sarb) to keep the repo rate of 8.25% unchanged on Thursday, thanks to some of the risks that could cause inflation to increase again receding.

While economists and financial advisors scrutinise these decisions for their impact on borrowing costs, including home loans, Grant Smee, CEO of online Proptech realtor Leadhome, says: “South Africans are well-acquainted with an ever-changing economic landscape, making those with home loans especially vulnerable to shifts in interest rates. It is important to note that policy makers at the Sarb consider a multitude of economic factors including inflation, employment, consumer spending, fiscal policy and financial stability when adjusting the repo rate.”

Smee warns that even a minor fluctuation in the interest rate can significantly affect your monthly budget.

“The repo rate has seen significant fluctuations over the years, ranging from highs of above 20% in the early 1990s to lows of around 3.5% in recent years. The Sarb kept the repo rate steady at a 14-year high of 8.25% at its September meeting, commenting that the fight against inflation was not over.”

Smee says a 0.5% interest rate hike, for example, could increase the monthly repayment on a R2 million home loan by approximately R630. He warns home buyers not to act on impulsive advice from property agents who are more interested in closing a sale than in your long-term financial health.

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Some inflation risks are receding – economist

Lisette IJssel de Schepper, senior economist at the Bureau for Economic Research at Stellenbosch University, says the bureau initially pencilled in a final 25 basis points hike in the repo rate, but now expects the Sarb to keep the policy rate unchanged in line with the consensus forecast.

“The main reason for the change is that some of the upside risks to inflation, particularly from the rand and oil price, receded. While the slowdown in inflation was interrupted, a general moderation in price increases is expected to take hold from the second quarter of next year onwards with inflation coming close to the midpoint of the Sarb’s target between 3 and 6% by the fourth quarter of next year.”

The bureau expects a further reacceleration in headline inflation for October to 5.8%, slightly above consensus when it is announced on Wednesday.

“While the rand exchange rate weakened through late September and early October, it since recovered these losses and is trading on a stronger footing to the dollar compared to the September meeting.”

De Schepper points out that another important reason is that instead of surging higher, the Brent crude oil price came down by about $10/barrel since the most recent meeting, while we are also likely at the peak of the global interest rate hiking cycle.

“However, as echoed by many global central bankers in recent weeks, the Sarb is likely to signal that it remains ready to hike the policy interest rate further should data point to a reacceleration in price pressure, with upside risks from food prices top of mind.”

In addition, the Sarb is likely to keep a keen eye on inflation expectations to see whether these start to drift back to the midpoint of the target band. As such, she says, while it is no longer the bureau’s view as stated earlier, a November hike remains possible.

“Importantly, hike or no hike this week, the Sarb will likely keep the repo rate restrictive well into next year.”

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Repo rate expected not to change as inflation eases

The Nedbank Group Economic Unit also expects the Sarb to stay put again at Thursday’s Monetary Policy Committee (MPC) meeting, Nicky Weimar, senior economist, says.

“We expect the Sarb to hold the repo rate steady for a third consecutive time.”

“We expect inflation to continue easing, trending comfortably within the target range for the rest of 2023 and beyond. Inflation will eventually fall close to the Sarb’s preferred 4.5% target in the third quarter of 2024. Headline inflation is forecast to average around 5.8% in 2023 before moderating to 4.9% in 2024 and 4.4% in 2025.

“We still believe the Sarb has already done enough to contain inflation and ensure a sustainable return to the 4.5% target. This is evident in weaker domestic demand, slower household credit growth and rising debt defaults. We acknowledge the various upside risks to the inflation outlook but we maintain that diminishing consumer demand will offset these risks.”

Therefore, she says the unit does not expect further rate hikes for this year, with the repo rate staying at 8.25%.

“We see the Sarb decreasing interest rates by 100 basis points throughout 2024, split into four 25 basis points cuts, with the first of these expected at the March MPC meeting.

“At the end of 2024, the repo rate will stand at 7.25% and the prime lending rate at 10.75%. Even at this lower level, interest rates will still be quite restrictive, trending about 100 basis points above pre-pandemic (January 2020) rates and the real repo rate averaging about 2.85%.”

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However, MPC will be ready to hike repo rate again

However, Weimar points out that the MPC will probably maintain a hawkish tone, highlighting continued upside risks to the inflation outlook.

These risks range from a vulnerable rand and the threats posed by the conflicts in the Middle East and Europe to global oil prices.

Other risks include doubts over the direction of food prices given the dangers posed by the ongoing geopolitical conflicts, increased protectionism, unpredictable weather conditions, renewed bouts of severe load-shedding and worsening transport bottlenecks to high wage growth relative to productivity gains and further above-inflation increases in electricity tariffs and other administrative prices.

“While the landscape is undoubtedly murky, many upside risks subsided somewhat over the past month. Global inflation appears to be firmly set on a downward trajectory, international food prices remain contained, oil prices have started to come down from the recent spikes caused by output cuts and geopolitical conflicts, the rand has regained some lost ground and load shedding has eased.”

In addition to these positive developments, most experts believe that this year’s heavy rainfall should sustain domestic food production even if El Niño leads to significantly drier conditions. On balance, she says, the underlying environment has become more supportive of lower domestic inflation in the months ahead.