“While most analysts believe that, barring shocks, rates have now peaked in South Africa, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) for understandable reasons still sees inflation risks as being on the upside.”

In commenting on the decision by the MPC on 27 March to again leave interest rates unchanged, Prof Raymond Parsons, economist at the North-West University (NWU) Business School, says it was widely expected that interest rates would be left unchanged.

“The SARB remains highly cautious amid the combined uncertainties it sees generated by factors such as ‘sticky’ inflation, rand volatility, United States interest rates, and South Africa’s pending elections on May 29.”

According to Prof Parsons, monetary policy will therefore not be recalibrated at this juncture, hence the decision to leave rates high for longer.

He says that, in the meantime, the continued prospect of unchanged borrowing costs is nevertheless a stabilising factor in consumer and business confidence, together with the prospect of lower inflation later in the year that is now being pencilled in by several analysts.

“For the MPC, the timing of any easing in interest rates clearly remains directly linked to future inflation trends and a further reduction in inflationary expectations. The MPC’s message is that it will not start cutting rates until inflation visibly winds down and is entrenched at the mid-point (4,5%) of the SARB’s inflation target range of 3% to 6%.”

Prof Parsons says the SARB wants to be satisfied that the outcomes are sustainable. “That said, it now seems unlikely that the SARB will begin to reduce interest rates until the second half of 2024. It may be anticipated that, in general, the key inflation data will be more favourable by then and, in particular, that the outcome of the elections will also be known.”

He explains that even if interest rates begin to ease in the latter half of 2024, the initial cut will probably be no more than 25 basis points.

“The MPC reaffirmed its 2024 GDP growth forecast of 1,2% and still sees the risks to the growth outlook as ‘balanced’. However, high-frequency economic data for early 2024 have been weak, and the SARB’s own composite leading business cycle indicator declined by 0,5% in January 2024. With monetary policy now remaining in restrictive territory for longer, these growth forecasts may be a little on the optimistic side, unless other economic reforms are more speedily implemented,” he concludes.