Interest rate cut anticipated as inflation declines in South Africa

AS THE cost of living continues to decline, with the latest inflation figures due out next Wednesday, those in the know are betting on an interest rate cut, even though it may be a close call.

Inflation data is due out on the same day as National Budget 3.0, with an announcement from the South African Reserve Bank to be made the following Thursday.

On the back of recent easing in the oil price, a more stable rand exchange rate, and easing global trade tensions compared when to the March Monetary Policy Committee (MPC) meeting, the South African Reserve Bank should cut rates by 0.25 percentage points, said Old Mutual chief economist, Johann Els. 

“I still think it's going to be a split decision by the MPC and there might still be warnings around global risks, but these risks have eased substantially since the March meeting,” he noted.

The MPC is made up of five people, with South African Reserve Bank Governor Lesetja Kganyago having the swing vote. Currently, the prime lending rate is 11%.

“With inflation this low across all categories, there is certainly room for at least 75bps of rate cuts over the next few meetings. The Reserve Bank will probably not cut by 75bps, but only 50bps,” said Els. He explained that this would be a two-meeting process. 

Nolan Wapenaar, Anchor Capital co-chief investment officer, said his view was to see a 0.25 percentage point interest rate cut later this month, followed by the same decline at the next meeting.  

“Skipping a cut in interest rates in May would be a missed opportunity. There is certainly a window of opportunity at the moment to cut rates,” said Els.

Given reports that National Treasury and the central bank are looking at reworking the inflation rate target to a narrower band than the current 3% to 6%, Wapenaar said this could mean fewer rate cuts for South Africa in the near term than there would have been. 

Kganyago has been publicly suggesting that the target band will be shrunk for some time. Els, however, said that such a policy move will take time to come into effect.

 On inflation, Els said that the April Consumer Price Index (CPI) is likely to come in at 2.6% when compared with the year-on-year rate currently of 2.7%. He added that there was a chance that the increases in the cost of living could come in at 2.5% year-on-year. 

“However, even 2.6% is exactly half the 5.2% of April 2024, a remarkable improvement in inflation over the past year. My expectation for the April number of 2.6%, but also very subdued price pressures seen everywhere else,” said Els.

Els explained that fuel dropped 76c a litre at the beginning of May versus a 65c a litre increase a year ago, which means that the base effect is already assisting lower inflation. In addition, he said there was very little price pressure from consumer goods, food, or services. 

“In terms of the inflation numbers over the next few months, May inflation and June inflation will likely also be close to 2.5%. In fact, my average second quarter CPI inflation forecast is 2.5%,” said Els. He added that his average for the year is 3.2%. 

Thanks to the declining oil prices, a decline of 25% since January in rand terms, South Africans could see more petrol price cuts coming in June, said Els.