South African consumers hoping for further interest rate cuts this month may be disappointed. Increased uncertainty over rate cuts in the US and the likelihood of a VAT hike in the revised budget mean the South African Reserve Bank (SARB) is expected to pause its rate-cutting cycle at its next meeting on March 20.
Global Uncertainty and the SARB’s Dilemma
Investec chief economist Annabel Bishop highlighted that the SARB’s decision will be heavily influenced by global factors, particularly the US Federal Reserve’s monetary policy stance. The Federal Reserve is also set to meet in March, but financial markets expect it to keep rates unchanged, with the first cut projected for June.
“The market ascribes a mere 4% chance of a 25-basis-point interest rate cut occurring this month in the US,” Bishop explained. “That probability rises to 43% by the May meeting, but a June cut is currently seen as almost certain.”
This delayed timeline presents a challenge for the SARB. Cutting rates before the US could weaken the rand, driving inflation higher and undermining the central bank’s efforts to stabilize prices.
Domestic Pressures: VAT Hike and Fiscal Risks
Compounding the SARB’s concerns is the likelihood of a VAT hike in the revised budget. The government is expected to announce a near 1% increase in VAT, which could add approximately 0.5 percentage points to the year-on-year inflation outlook over the next 12 months.
“A VAT increase would add upward pressure to inflation,” Bishop warned. “This makes it harder for the SARB to justify rate cuts any time soon.”
Additionally, South Africa’s budget faces higher borrowing risks, particularly if the government increases spending while limiting revenue-raising measures. A more expansionary fiscal policy could drive up inflation expectations, forcing the SARB to maintain a hawkish stance.
Inflation Trends and Wage Agreements
Despite these challenges, inflation in South Africa has been relatively subdued. The latest data for January showed consumer price inflation at 3.2% year-on-year, near the lower end of the SARB’s 3-6% target band. February’s inflation reading, due next week, is expected to drop even closer to 3%, with projections suggesting inflation could remain below 3% until at least June.
“Such a modest inflation environment, absent a 2% hike in VAT, would support further interest rate cuts in South Africa,” Bishop said.
However, the SARB remains cautious due to broader global economic uncertainty and domestic pressures, such as the government’s multi-year wage agreement with civil servants, which exceeds inflation and could contribute to sustained price pressures.
What’s Next for Interest Rates?
Given these factors, Bishop believes the SARB will err on the side of caution. “An increase in VAT, along with above-inflation wage agreements, will likely reinforce the SARB’s cautious stance, as it sees risks to the inflation outlook skewed to the upside.”
Looking ahead, Investec still expects the SARB to deliver two interest rate cuts in 2024—one in July and another in November, each by 25 basis points.
The combination of a potential VAT hike, global market uncertainty, and domestic fiscal pressures has created a challenging environment for the SARB. While inflation remains subdued, the central bank is likely to delay further rate cuts to avoid undermining its inflation targets and destabilizing the rand.
As South Africa navigates these economic headwinds, consumers and businesses must prepare for a prolonged period of cautious monetary policy. The SARB’s decisions in the coming months will be critical in shaping the nation’s economic recovery and stability.
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