With inflation rising, will South African consumers see any relief in interest rates?

While local economic tailwinds have given the South African Reserve Bank (SARB) room to cut rates earlier this year, commentators largely agree that a further reduction is unlikely when the SARB announces its decision next Thursday.

BetterBond’s Bradd Bendall said homeowners would welcome another repo rate cut, but recent inflation levels suggest the bank will hold rates steady at 7%.

Inflation has ticked up to 3.5% from 2.7% in March, and economists expect it to settle around 4% by year-end.

Yet, maintaining the prime lending rate at 10.5%, Bendall added, is necessary if the SARB aims to keep inflation closer to its lower 3% target.

Old Mutual’s Johann Els echoed this, noting that while inflationary conditions have improved modestly, overall economic growth remains subdued.

Based on Statistics South Africa’s latest data on economic growth, of 0.8% in the second quarter, economists are now putting full-year gains at anywhere between 0.9% and 1.2%.

This compares badly with National Treasury’s expectations of 1.4% - and even that figure is nowhere near the 3% Operation Vulindlela is aiming for this year.

Els expects rates to remain unchanged, potentially through to 2027.

The decision has broader implications for households and the wider economy.

Lower rates typically give consumers more disposable income, stimulating spending and boosting growth.

With the repo rate likely to stay put, consumers will have less room to spend, which could limit momentum in key sectors.

SARB Governor Lesetja Kganyago, meanwhile, has argued that lower inflation is the key to sustainable growth and cheaper borrowing costs.

“For policy, as we showed last time, lower inflation allows for lower interest rates,” he said.

Kganyago has said: “For a 4.5% objective, rates bottom out around 7%. By contrast, the forecast for a 3% objective has roughly five more cuts, over the medium term, taking interest rates slightly below 6%,” he said in the most recent statement on interest rates.

While he conceded there would be “a modest growth sacrifice,” Kganyago insisted that locking in low inflation now would benefit the economy in the long run.

Yet, Kganyago could see significant challenges in achieving his ambitious target of a 3% inflation rate, largely due to government-controlled costs like petrol and electricity.

Anchor Capital’s Casey Sprake and independent economist Dr Roelof Botha highlighted the challenges of government-driven costs such as electricity and petrol, as well as wage increases and possible rand fluctuations causing inflation to increase.

Botha warned that inflation could rise quickly to 4% to 5% under certain conditions and suggested that adjusting the target range to 4% - rather than cutting rates – would be more sustainable.

Els added that SARB’s inflation assumptions have been on the optimistic side — for example, they will need to adjust for the National Energy Regulator of South Africa’s recent upward revision of electricity tariffs.

National Treasury and the SARB’s Monetary Policy Committee are investigating whether maintaining low and stable inflation continues to support economic growth.

This seems to be a reversal of Finance Minister Enoch Godongwana’s public pushback of SARB Governor Lesetja Kganyago’s proposed 3% target.

The two entities are now reviewing whether adjustments to the macroeconomic framework could make it more effective.

For now, South Africans may have to wait before seeing relief through lower borrowing costs.

IOL Business