Can we still expect the Reserve Bank to cut the repo rate this year?


Although economists predict that the Reserve Bank will start cutting the repo rate in the second half of the year, El Niño, the weak Rand and high oil prices can still cause inflation to increase and make the bank more careful about cutting rates to keep inflation in check. The uncertainty around next month’s election outcome also plays a role in this.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says their average inflation forecast of 5.2% for 2024 remains intact, but risks to the inflation outlook remain firmly tilted to the upside.

“More specifically, the South African rand is likely to remain skittish ahead of the elections, while international oil prices increased since the start of the year and the adverse effects of El Niño have only recently become noticeable.”

El Niño is threatening maize production and therefore food prices

The prevailing El Niño weather pattern looks set to result in possible white maize shortages in Southern Africa, which will cause a reversal in maize meal prices and drive food price inflation higher towards the end of 2024, he points out.

“The intensification of El Niño puts Southern Africa’s entire supply chain of maize, the region’s main staple, along with sorghum and wheat, under pressure. Other salient regional maize producers, including Malawi, Zambia and Zimbabwe, have also flagged rising price risks as a result of prolonged dryness.”

Van der Linde says all three of these countries announced national disasters, with Zambian authorities stating that one million hectares of the 2.2 million hectares of planted crops have been destroyed.

“Zimbabwe’s president stated that more than 2.7 million people in Zimbabwe will go hungry this year and that the country needed more than $2 billion in aid to feed those facing food insecurity. Reports suggest that the drought has wiped out around half the country’s maize crop.”

Fuel prices are also not looking good

In addition, South Africa experienced consecutive month-on-month fuel price increases since February 2024, with domestic fuel prices not far off from post-invasion record highs. The South African Rand has also been on the back foot in recent months and although the stronger US dollar has been a key driver, election uncertainty is another important factor, Van der Linde says.

“We forecast the rand exchange rate to average R19.0/$ in 2024 and to remain on the back foot heading into 2025 (R19.2/$).”

Van der Linde says that with higher oil prices, the weak rand is not helping. “Higher food prices as a result of El Niño are not the only risk to price inflation, especially in the case of South Africa. The increase in international oil prices since the start of the year contributed to three successive domestic fuel price increases, which will put upward pressure on the transport price index in the coming months.”

He warns that there are continuing signs of rising oil demand, which have led to Brent crude oil reaching multi-month highs and recently breaching the $90 per barrel level. “However, we forecast oil prices to decline gradually in the second half of 2024 as additional supply reaches the market, with Brent seen closing this year at $79 per barrel.”

Higher international oil prices, together with a weaker currency, pose a risk to South Africa’s inflation outlook, Van der Linde says. “Meanwhile, the South African Rand has remained on the back foot since the start of 2024 and we expect that to be the case over the coming months.”

Uncertainty about election outcome also weights on repo rate

There are several reasons for this, both from a global and local macroeconomic perspective, but a key factor is the uncertainty regarding next month’s election outcome.

He says the spectrum of likely rand reactions is wide and tied to the election results, with polling suggesting the ruling African National Congress (ANC) will still be the largest party but will almost certainly lose its majority and have to go in search of coalition partners.

“South Africa’s elevated risk premium limits the extent to which the Rand benefits from the positive interest rate differentials with advanced economies. After having averaged R18.9$ during the first quarter of 2024, the Rand exchange rate is currently trading at R18.8/$.

“We forecast the domestic exchange rate to average R19.0/$ in 2024 and it is expected to remain on the back foot heading into 2025 (R19.2/$). Consequently, price inflation is expected to hover near the upper bound of the inflation target band for the remainder of this year and most of 2025. This also means that the Reserve Bank might want to wait a while longer before it starts cutting interest rates.”


The Citizen / Ina Opperman