What goes up must come down – but not the interest rate, and not this month

South Africans should not expect the interest rate to be cut this month. Picture: Karolina Grabowska/Pexels

South Africans should not expect the interest rate to be cut this month. Picture: Karolina Grabowska/Pexels

Published Nov 7, 2023


This month’s fuel price decrease has not only been welcomed by South Africans for the impact it will have on their pockets, but also because it creates hope for lower inflation and, perhaps, an interest rate decrease.

But alas, this hope does not appear to be realistic – not according to the experts anyway, and not this month.

In fact, FNB senior economist Koketso Mano says the Bank expects a “slight increase” in inflation to 5.6 percent in October (the results of which will be revealed at the end of November, the day before the interest rate decision). On the positive side though, he feels the fuel price cut will probably support lower inflation in November (the results of which will be revealed in December).

“Unfortunately, the downward trend in inflation will likely be bumpy, influenced by the volatility in international markets and the local bird flu outbreak. Nevertheless, the expected trend is downward. We forecast inflation to average 5.9 percent this year, 5.0 percent next year, 4.8 percent in 2025, and moving more firmly towards target in 2026.”

For now though, the best South Africans can hope for, and expect, is a stable interest rate at the end of this month, although some economists still believe it will be hiked.

Mano explains that a key feature of South Africa’s inflation profile is that it is mostly supply-side issues that are providing upward pressure; a look at core (underlying) inflation shows that demand-driven pressure is contained.

“There is a likelihood that, had it not been for the pass-through of an undervalued exchange rate and higher operating costs, core inflation could have been even weaker. This is especially when you consider basket items that are more firmly driven by demand such as housing (actual rentals and owner’s equivalent rent) which is currently at 2.6 percent.”

Furthermore, the MPC has shown concern around the second-round effects of higher food and transport costs, although core inflation has so far surprised to the downside.

“So, with headline inflation expected to slow over the medium term, we thought the MPC would be more concerned by funding risks as adverse risk sentiment and South Africa’s twin deficit provides upward pressure to local rates. However, the Fed, ECB and BoE all kept rates unchanged at their latest meetings.

“Also, the market did not receive the MTBPS as negatively as may have been feared. This supports our view that rates will remain unchanged at the November meeting, he says, adding: “It is important to note that the October Consumer Price Inflation print will be a day before the announcement which is often too late for the South African Reserve Bank’s (SARB) forecasting process.”

That said, when the MPC met in September, the forecast for Q3 2023 inflation was 5.1 percent versus the actual outcome of 5.0 percent.

“That provides a lower starting point for their forecasts, but we do note the risk that they may predict a more pronounced bird flu impact than we currently do. Ultimately, our point on the headline inflation trend and weak core inflation holds.”

Based on the experience over this year, Samuel Seeff, chairman of the Seeff Property Group, agrees that “the best we can hope for is for it to remain unchanged”.

“It is very difficult to predict what inflation will do as there does seem to be some volatility, but it bears repeating that it is not due to consumer demand and spend in the domestic market, but external factors. The lower fuel price should help to contain inflation slightly, but it is difficult to predict as we have seen over the last year.

“The past two Novembers have seen interest rate hikes and there seems to be a growing expectation among economists of a potential 25bps (0.25 percent) hike. It seems a strong possibility whether there is an increase or decrease in inflation.”

He says the property group would “strongly advocate against this, and reiterates that the high interest rate is stifling the economy and property market and is unnecessary at this stage”.

“Interest rate hikes have a dire effect on the property market; already struggling consumers who have seen low salary increases have had to absorb aggressive hikes this year and they are going to start falling into financial distress. Seeff simply cannot see how a higher interest rate at this stage will be helping – it will do even more damage to the economy and property market.”

Seeff adds that banks and mortgage originators are warning that the market is beginning to feel the pressure and there is concern that a higher interest rate hike. And as the country is entering the busy retail season, the economy should not be constrained.

“We are seeing good buying conditions with first-time buyers still showing a high appetite for property acquisitions, and till aided by favourable bank lending conditions including 100% bonds for qualifying first-time buyers, it would be hugely disappointing if the Reserve Bank does not take a pause.”

Christie Viljoen, senior economist at PwC South Africa, states that fuel prices are a key contributor to consumer price inflation. Yet while a decline in fuel prices should contribute to less pressure on the inflation index from one month to the next, the diversity of the consumer basket means lower fuel prices will not automatically result in a lower year-on-year inflation.

As such, PwC expects the rate to be hiked by 0.25 percent this month.

“The latest inflation reading does not directly determine what the SARB does with interest rates. The MPC makes interest rate decisions based on their inflation forecasts. If the latest inflation reading is much higher or lower than the SARB expected, this would impact its departure point for updating inflation forecast. This, in turn, could make them rethink the interest rate trajectory.”

He adds that the inflation forecasts that the interest rate decision is influenced by is determined by a number of factors apart from the latest inflation data. These include the exchange rate, commodity prices forecasts, and interest rate expectations, among others.

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