Sticky Inflation Lowers Chances of Interest Rate Cuts

The Reserve Bank’s monetary policy review suggests inflation may not drop below 5% in 2024, impacting potential interest rate cuts and economic stability.

Persistent inflation in South Africa casts doubt on the likelihood of interest rate cuts in the near future, according to the Reserve Bank’s April monetary policy review. Despite expectations for inflation to moderate, it is unlikely to fall below 5% this year, prompting concerns about maintaining high borrowing costs and economic growth.

The review, released on Tuesday, highlights ongoing challenges in reducing inflation to the central bank’s target midpoint of 4.5%. Inflation is predicted to average 5.1% in 2024, a slight decrease from 6% in 2023 and 6.9% in 2022. However, achieving the target midpoint is anticipated only by the end of 2025.

Since November 2021, the repo rate has increased by 475 basis points, reaching 8.25% in May 2023. This has placed significant strain on indebted South Africans and a sluggish economy hampered by load-shedding and logistical issues.

Despite a “moderately restrictive” interest rate stance, inflation has remained above the target midpoint for 36 consecutive months. Earlier forecasts suggested potential rate cuts in early 2024, but sticky inflation has led economists to predict delays until September or later.

Jee-A van der Linde, a senior economist at Oxford Economics Africa, noted that the March inflation data, showing a consumer price index (CPI) of 5.3%, indicates rising odds of delayed rate cuts this year. The Reserve Bank now forecasts that policy rates may only be lowered in early 2025 due to slow domestic disinflation.

While global inflation is expected to moderate, it remains above the targets of major central banks. Recent statements from the US Fed and the European Central Bank indicate they will delay interest rate cuts due to persistent inflation.

Governor Lesetja Kganyago emphasized the need for South Africa to lower its inflation target to stay competitive globally. Despite challenges, the Reserve Bank remains committed to achieving the 4.5% midpoint target over the forecast period.

Economic stability continues to be threatened by factors such as volatile food and fuel prices, as well as administered prices for water and electricity. The Reserve Bank’s cautious approach reflects the delicate balance required to manage inflation without stifling economic growth.