SA consumers face stubborn borrowing costs on Fed’s rate cut delay, high inflation

SA consumers face stubborn borrowing costs on Fed’s rate cut delay, high inflation

The cost of borrowing in South Africa will remain elevated for longer as the first interest rate cut in four years now looks likely to be pushed further out to the final Monetary Policy Committee (MPC) meeting for the year in November.

The SA Reserve Bank (SARB) has kept rates at a 14-year high of 8.25% since May 2023, as it tries to tame consumer price inflation (CPI), which has remained towards the upper limit of its 3-6% target range, though moderating to 5.3% in March from 5.6% in February.

However, inflation is still expected to hover around 5% for the better part of the year as the US Federal Reserve (Fed) continued to signal that interest rate cuts were unlikely in the near term.

As widely expected, the US Fed last week held rates steady at 5.25%-5.5% for a sixth consecutive time during its May meeting, citing a tight labour market and sticky inflation.

The Fed’s communication has turned increasingly hawkish, with the committee stating that it does not consider it appropriate to cut interest rates until it has grown more confident that inflation is moving sustainably towards the 2% target.

FNB economists on Friday said this delay by the Fed would factor into the domestic policy adjustment, ultimately impacting economic outcomes, given the pivotal role of the US in the global economy, particularly for emerging markets such as South Africa.

In a note, FNB revised its domestic interest rate outlook following the weaker-than-expected economic activity during the first quarter, persistent domestic inflation, associated risks, and the delay in the Fed interest rate cutting cycle.

“We now anticipate a delayed initiation of the rate-cutting cycle by the SARB, with the first cut expected to materialise only in November 2024, as opposed to July. Notably, we have scaled back total cuts in the forecast horizon by 50 basis points, such that the repo rate will only fall to 7.50% by July 2025 from 8.25% currently,” they said.

“The updated profile recognises a shift in the SARB’s inflation objective to 3% from 4.5% as reflected in recent engagements. That said, risks to this view are to the downside in the outer period of the forecast horizon. We project headline inflation to fall to 5.2% this year, 4.7% in 2025, and 4.5% in 2026.

“The global interest rate environment, particularly the decisions of the US Fed, remains a significant aspect of our latest macroeconomic projections. The US Fed’s reaffirmation of its commitment to maintaining high rates to achieve the 2% inflation target, as evidenced by its unanimous decision to maintain the Fed funds rate within the 5.25% to 5.50% range, solidifies our view of a delayed cutting cycle.”

Nonetheless, some good news came from the third estimate of South Africa’s summer harvest, with the country’s Crop Estimate Committee (CEC) showing a higher forecast for the crop size in its most recent (April) estimate, not a decline as feared.

The upwards revision is material, reducing the risk of imports and having to pay high international prices for white maize, a staple food in South Africa.

The CEC now notes overall that the “size of the expected commercial maize crop has been set at 13.39 million tons, which is 135 950 tons more than the previous forecast of 13.25m tons” as yellow maize estimates improved too.

Investec chief economist Annabel Bishop said on Friday that the better-than-expected forecast for SA’s summer harvest versus agricultural economist expectations was positive for the country’s inflation outlook.

“Food price inflation, the other big driver for the CPI, remains contained in SA, with little pressure… at the agricultural level, as producer price inflation has not yet seen feed-through effects from crop damage in summer due to high temperatures,” Bishop said.

“Rand strength helps reduce inflation, as both food and fuel prices in SA are driven by international commodities, but the domestic currency will need to see substantial, sustained strength to make an impact on SA’s inflation outcome.

“The Reserve Bank’s Monetary Policy Review notes the risks are still tilted to the upside for inflation for the year as a whole, and while we expected CPI inflation to average around 5.0% year-on-year, the upside risk has eased slightly recently.”

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