Lullu Krugel, PwC South Africa Chief Economist and Christie Viljoen, PwC South Africa Senior Economist
Exchange rate, industrial production and international monetary policy factors all point to local policymakers not needing to increase the repo rate further at this time
Johannesburg, 21 November 2023 — The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) meets for a final time this year from 21 to 23 November 2023 to deliberate on interest rates. Following several recent developments and data releases, PwC South Africa expects the SARB to hold the repo rate steady this week.
At their last meeting in September, three MPC members voted to keep the repo rate at 8.25%, while the other two policymakers favoured an increase to 8.50%. The repo rate was eventually left unchanged based on the macroeconomic circumstances at the time and the medium-term economic forecasts generated by the SARB.
Figure 1: SARB MPC votes
Source: PwC calculations based on SARB data
Following the September MPC meeting, many economists were, by October, thinking that policymakers would lift the repo rate by around 25 basis points in November. The SARB noted in September that risks to the inflation outlook were to the upside and many signs pointed to more upwards pressure on consumer price inflation.
However, over the past several weeks, a collection of developments and data releases have eased concern about inflation in the short-term, while the outlook for economic growth has also deteriorated.
Firstly, from a financial markets perspective, the rand has strengthened against major currencies since the last MPC meeting. The South African currency ended September near R19.50/$ and has subsequently appreciated to trade below R18.70/$ over the past two weeks. This is positive news when thinking about the cost of imported goods like fuel and food products. The oil price has also softened, with Brent crude now trading below $78/bbl compared to above $82/bbl at the start of November. As such, local fuel prices are expected to decline again in December, following this month’s downward adjustments.
Lullu Krugel, PwC South Africa Chief Economist, says:
“The stronger rand will reduce the cost of imported goods. Imported inflation was only 1.4% y-o-y in August and 2.8% y-o-y when excluding fuel products. A favourable exchange rate position will further ease pressure on the cost of the country’s import basket heading towards the end of 2023. Imported inflation contributes directly to headline consumer price inflation through goods that are sourced internationally, including fuel, appliances and motor vehicles, to name a few.”
Secondly, from a macroeconomic perspective, the most recent manufacturing and mining production data from Statistics South Africa sent disappointing signals about the outlook for economic growth in the third quarter. Manufacturing output slumped by 4.3% y-o-y in September while mining production was down 1.9% y-o-y. While lower international commodity prices and pressure on global demand were influential, local challenges like load-shedding and constrained rail services contributed to this weak industrial sector performance.
Christie Viljoen, PwC South Africa Senior Economist, says:
“While South Africa has received some positive employment data and better-than-expected retail sales numbers over the past week, the overall outlook for the economy remains downbeat following recent disappointing mining and manufacturing production reports. This industrial data shows that local and international factors are weighing on the value and volume of factory goods produced and minerals extracted. This could result in the SARB lowering its economic growth expectations for 2023 and 2024.”
Thirdly, cooling inflation in the world’s largest economy will likely result in the US Federal Reserve holding off on further interest rate hikes in the near-term, before easing monetary policy in 2024. While the SARB does not directly track international lending rates in its policy decisions, the South African interest rate premium over advanced economies is an important aspect in the valuation of the rand which, in turn, impacts the nature of imported inflation.
Finally, core inflation has shown favourable trends of late. In September, core inflation — a less erratic measure of inflation as it excludes the volatile food and fuel prices — declined to 4.5% y-o-y. This decline to the midpoint of the inflation target range would have eased concerns in the minds of MPC members about underlying inflation.
Combined, these four factors point to easing pressure on the local inflation and global interest rate forecast, alongside further pressure on the domestic economic growth outlook. PwC South Africa’s economists believe that following no change to interest rates in July and September, the SARB MPC will again hold steady in November, with the repo rate peak firmly in place.
The next move in interest rates will be down: we expect this to happen around the middle of 2024. The next round of SARB forecasts will help economists to refine their predictions of when interest rates will start coming down and by how much. It is quite certain that the SARB will not be cutting the repo rate as deeply as it did during the COVID-19 crisis. At present, we believe the repo rate could ease by a cumulative 150 basis points between mid-2024 and end-2025.
ENDS
