South African interest rates to remain steady, forecasts Strategy&

Following a long process of deliberation, the South African Reserve Bank (SARB) has made the decision not to introduce a hike in the benchmark repo rate. According to global management consulting firm Strategy&, interest rates are unlikely to increase over the coming months, in line with analyst expectations.

The question of interest rates has presented an interesting dilemma for policy-makers in South Africa. On the one hand, the country suffers from high tax default rates and requires additional funds in public coffers, although an increase in interest rates would go against other objectives of the current administration.

South Africa’s new President Cyril Ramaphosa has emphasised the desire to promote foreign direct investment (FDI) into the country, not least through his plans to add as much as $100 billion to the country’ overall FDI levels over a period of the next five years.

Increasing interest rates creates a barrier for these objectives, which has been a cause for deliberation within the SARB. The bank already increased interest rates back in November, and was due to decide on a further increase over the last month. The SARB has now decided against such a hike.

The refusal to hike rates represents a balancing act of sorts, given that the SARB’s monetary policy committee has recommended as many as three increases by the end of next year, primarily in order to preserve the governments fiscal capacity. According to Strategy&, a strategy and economic subsidiary of PwC, however, the country will survive despite the refusal to hike interest rates.

“South Africa’s economy is expected to bounce back somewhat in 2019 and 2020, faciliated by an anticipated cyclical upswing and improvements in economic sentiment helped by recent initiatives like the economic stimulus plan, jobs summit and investment summit,” said Maura Feddersen, Economist at  Strategy&.

“However, the possibility of fiscal slippage and a lack of structural reforms can weigh on longer-term economic prospects. Poor economic growth outcomes and indications of a tentative recovery in 2019 and 2020 are likely to prevent the SARB from raising interest rates in January, especially in the absence of additional supply-side pressures that could cause inflation to move closer to the upper end of the target range,” Feddersen commented.

The economist added that several risks to the growth outlook remain, in particular, “concerns around electricity supply shortages. Weak business and consumer confidence furthermore weigh on fixed investment and curtail the potential for faster economic growth. International volatility also poses a threat to domestic economic growth, with ongoing trade tensions between the United States and China, Brexit uncertainty and the threat of emerging markets risk spill-over adding to domestic growth concerns.”