Economists say a drop in inflation is unlikely to result in an interest rate cut when the Monetary Policy Committee (MPC) meets on Thursday.
Last week Stats SA announced a drop in headline and food inflation, saying that the consumer price index (CPI) decreased from 5.3% in March to 5.2% in April and food inflation dropped from 5.1% in March to 4.7% in April.
Experts say that inflation still remains above the South African Reserve Bank’s (SARB) target of 4.5%.
Neil Roets, Debt Rescue CEO, said that while the recent inflation data showing a slight cooling is positive, it is still unlikely that the SARB will start cutting interest rates soon.
“The SARB’s focus is on ensuring inflation is under control and sustainably tracking towards the midpoint of its target range. Given persistent inflationary pressures and the cautious stance of other central banks, like the US Federal Reserve, maintaining the current rate is prudent to stabilise the economy.”
Roets said consumers are struggling financially with the high interest rates.
“Despite this cooling of inflation, the cost of living continues to increase monthly, albeit at a slower rate. This continues to put immense pressure on households, making it difficult for them to manage their finances. Many consumers are also finding it challenging to keep up with car loans and mortgage payments, leading to an increase in defaults and financial distress, and the risk of legal action on assets.”
Waldo Krugell, Professor in Economics at North-West University, said the MPC will keep the repo rate unchanged this week. “From where they are sitting there is no reason to cut it. They want more evidence that the inflation rate and inflation expectations are falling sustainably while we have only seen the start of that process.”
Professor Irrshad Kaseeram, from the University of Zululand’s economics department, said interest rates (the repo rate) will remain unchanged.
“The SARB has shifted its policy focus to below the inflation rate and it must be below 4.5% for a cut in the repo rate to ensue. Although inflation successfully has been on a downward trend from 5.6% in February to the current level of 5.2%, it is still (not at) the target of below 4.5%.”
Kaseeram added that most mainstream economists support the Sarb’s decision because an emerging market like South Africa is vulnerable to developments in the US’ Federal Reserve System (Fed).
“The Fed is still concerned about inflation and are only expected to cut their rate in the later part of this year or perhaps next year. It is imprudent for the SARB to cut before the Fed does, since it will cause the rand to weaken further which will cause further rounds of inflation rises and monetary tightening. Hence at best we will only see interest rates cut in the latter part of 2024.”
Professor Raymond Parsons, from the North-West University Business School, said the MPC is likely to leave interest rates unchanged.
“Although CPI inflation has recently begun to ease, global oil prices have weakened and the rand has firmed, the MPC will need more evidence that the battle against inflation in South Africa is being permanently won.”
Parsons added that for the MPC, there will still remain too many external and domestic uncertainties around the inflation outlook, including the outcome of this week’s elections.
“Cutting interest rates now will be seen by the MPC as premature. Borrowing costs for business and consumers will therefore remain higher for longer. On present evidence, and barring shocks, the MPC is therefore likely to begin cutting the repo rate only much later this year.”
The Mercury