As was widely anticipated, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) by a unanimous vote decided at a third consecutive meeting (and its last meeting of the year) to again keep interest rates unchanged, with the repo rate staying at 8,25%.
Prof Raymond Parsons, economist from the North-West University (NWU) Business School, says given the continued concern of the MPC about upside risks to inflation, the tone of the statement still reflected a hawkish pause, but the decision was consistent with the MPC’s assessment of the current overall balance of risks in the economy.
“A reasonable conclusion from the latest economic trends is that, barring shocks, South Africa’s interest rates may now have peaked. While interest rates will stay higher for longer, further hikes may not be necessary.”
According to him, the continued period of stability in interest rates experienced since May this year remains a positive factor for business and consumer confidence at a time when borrowing costs are still at a 14-year high, having risen a cumulative 425 basis points (bsp) since November 2021.
“The SARB has acknowledged that monetary policy in South Africa is now well into restrictive territory. Trends in retail sales, vulnerable household spending, bad debts and other relevant high-frequency data all now confirm weak overall domestic demand.”
He says the MPC confirmed that there are at present no elevated demand pressures in the economy. “Therefore, despite some remaining price ‘stickiness’ and upside risks to the inflation outlook stressed by the MPC, the outlook for both global interest rates and domestic inflation trends is now pointing towards a possible end to the interest rate-raising cycle.”
Prof Parsons explains that on present evidence, prospects for both the inflation and interest rate are strengthening the case for no further hikes in borrowing costs, unless serious shocks emerge from an uncertain economic environment.
If interest rates indeed have now peaked, how quickly might they begin to fall? “The MPC will, of course, still respond only cautiously in tandem with the pace at which inflation, especially the key core inflation, stabilises over the next few months. Core inflation at 4,4% is now in line with the SARB’s midpoint inflation target of 4,5%. Headline inflation is expected to still be within the overall official inflation target range of 3% to 6% by year-end.”
Prof Parsons says the MPC is likely to keep interest rates high until they are certain that they are no longer needed and is unlikely to declare premature victory over inflation trends. However, if better news on the inflation front is confirmed in the months ahead, it is feasible to expect that the MPC may begin reducing interest rates by, say, about the middle of 2024.
“There is therefore at present enough economic data to suggest that by this time next year, borrowing costs, although still in restrictive territory, will be lower than they are now.”
According to Prof Parsons, the SARB has previously urged additional measures to contain inflation that are within the public sector’s ambit, including achieving a sustainable public debt level, increasing the supply of energy, moderating administered price inflation and keeping real wage growth in line with productivity gains.
“Indeed, in the context of rising inflation driven mainly by fuel and other administered prices,” the Financial and Fiscal Commission also said recently, “a policy mix between monetary and fiscal policy is much more critical.”
Prof Parsons says in navigating global and domestic headwinds in 2024 we now need to also recognise that the combined impact of monetary and fiscal policy in South Africa has steadily become more convergent in that they are, to a greater or lesser extent, now both in restrictive territory.
“Their collective and cumulative effect on economic activity next year puts coordinated policymaking in the spotlight again, especially with the expectations around the main Budget in February 2024. Finally, good news was that the MPC raised its growth forecasts for 2023, 2024 and 2025 by 0,1% to 0,8%, 1,2% and 1,3% respectively. This forecast is, however, in particular strongly predicated on Eskom load-shedding being reduced over time, to which must now be added the constraints on growth also caused by the Transnet port and rail bottlenecks.”
Prof Parsons concludes that this again emphasises the extent to which business confidence and South Africa’s economic performance are largely dependent on the speedy implementation of structural economic reforms in the period ahead.