SA is nearing the end of interest rate hiking cycle

by Raymond Parsons: Professor at the NWU School of Business & Governance and a former special policy adviser to Busa.
As expected, the MPC unanimously decided at a fourth consecutive meeting (and its first meeting of 2024) to again keep interest rates unchanged and thus higher for longer. The tone of the MPC’s statement remained highly cautious, as it did not see the battle against inflation as yet being permanently won. The MPC still saw upside risks to inflation in South Africa against the background of global uncertainties, inflationary expectations and sensitivity to currency weakness.

There is nonetheless positive economic data that generate the real prospect that both globally and in SA inflation this year is beginning to unwind and may becoming less entrenched. In SA inflation remains within the SARB’s inflation target range of 3%–6%, with both headline inflation and factory gate inflation again easing further in December 2023. The definitive ‘core inflation’ trend is still unchanged at the 4.5% midpoint of the SARB’s target for now.

The economic evidence therefore indicates that, if the economy now evolves in line with forecasts, South Africa is at the end of the interest rate hiking cycle. Borrowing costs, although still in restrictive territory, could begin to slowly decline later in 2024. The timing of the easing in interest rates this year will presumably be decided at the point at which the SARB is convinced that inflationary expectations have become firmly anchored. The Budget and the 2024 elections still lie ahead.

It was inevitable that the MPC had to slightly reduce its GDP growth forecast for 2023 to 0.6% from its previous 0.8%, which may mean that its retained growth forecast of 1.2% in 2024 may be a little on the optimistic side. A worrisome recent negative signal on the economic activity front was the November 2023 contraction of -0.4% in the Reserve Bank’s composite leading business cycle indicator, for the first time since May 2023.

The modest growth outlook again emphasises the extent to which growth-orientated policies and projects, such as resolving the transport and energy bottlenecks, still need to be urgently implemented to achieve higher job-rich growth rates. These priorities remain imperative if South Africa is to ensure that the tailwinds will prevail over the headwinds in shaping the country’s economic performance in 2024.

SARB Governor Lesetja Kganyago indicated, in response to a question at the media conference, that a process was now under way not only to fill the current vacancy of a Deputy-Governor but also to enlarge the MPC from its present five members to seven members in due course, as permitted by its terms of reference. This is a positive development, as it brings the MPC up to its full strength and more in line with global best practice.

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