Economic insights from consultancy PwC point to South Africa having reached the end of its interest rate cycle, echoing the sentiment of fund managers and economists who say that attention is turning to rate cuts.

According to PwC’s August Economic Outlook report, the group expects the South African Reserve Bank (SARB) Monteary Policy Committee (MPC) to hold on rates when it meets this month, and again when it meets for the last time in 2023 in November.

If positive economic conditions – like lower inflation – persist, the country could start seeing rate cuts in 2024, with around 200 basis points coming off the repo rate by the end of 2025.

The group said that this marks a turn in sentiment around interest rates, which can be demonstrated by the voting patterns of the MPC since the cycle started.

The start of the rate hike cycle in November 2021 came with a three-to-two split in favour of the first hike, followed by a four-to-one split. In the eight votes to follow, the SARB’s MPC was united in the move to keep hiking rates.

The latest meeting – in July – was the first time in a year and a half that the committee was split again, showing a three-to-two vote in favour of holding rates.

PwC said that the hold in interest rates immediately raised the question of whether the tightening in monetary policy was over, to which SARB Governor Lesetja Kganyago said: “Is this the end of the hiking cycle? No, it is not. It depends on the data and risks; that is what it boils down to.“

While, at face value, Kganyago made it sound as if more rate hikes could be coming, PwC said that he was likely speaking to how the end of the cycle couldn’t be called ahead of any data.

“We think the governor was actually saying that he was not able to call an end to the hiking cycle given that interest rate decisions are — as the MPC regularly reiterates — based on data and developing risks. As a result, the governor could not announce a stop to rate hikes; this can only be called in hindsight,” the group said.

Given this stance and the fact that data like inflation are pointing in the right direction, PwC said that it is likely that rates have peaked alongside the decline in inflation.

“Another key metric we are monitoring is the real repo rate, i.e. the inflation-adjusted return provided by domestic interest rates. The SARB expects the real repo rate to increase from -1.4% in 2022 to 2.7% this year and 3.0% in 2024. This is above the SARB’s view of a steady state neutral real interest rate of 2.5,” it said.

The group said that the next step in the interest rate cycle will most likely be a reduction in the repo rate as inflation abates further.

“Remember, the first part of the rate hiking cycle was aimed at undoing the very accommodative monetary policy seen during the pandemic in 2020-2021, while upward adjustments of late have been linked to elevated inflation.

“As a result, with the SARB seeing inflation falling to an average of 5.0% in 2024 and 4.5% in 2025, there is room to start cutting rates next year,” it said.

PwC said that rate cuts are likely to start in the middle of 2024, pending favourable data and risk developments. Economists and fund managers have been more bullish on this front, predicting rate cuts from early 2024.

“Interest rates will not return to the low levels observed in 2020, given the increase of 475 basis points over the course of nearly two years. Instead, two percentage points could likely be shaved off towards the end of 2025,” PwC said.

Based on current forecasts, the repo rate would be around 6.25% at the end of 2025, with accompanied headline consumer price inflation of approximately 4.5% y-o-y.

“That would bring the repo rate back to pre-pandemic levels and support household spending,” it said.

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