The Monetary Policy Committee (MPC) begins its deliberations on Tuesday and space on a range of fronts has opened for a pause in a tightening cycle that has seen it hike rates by 475 basis points since November 2021, taking its key repo rate to 8.25% and the prime lending rate to 11.75%. 

South Africa’s consumer price index (CPI) slowed faster than expected in May to 6.3% year on year, a 13-month low, from 6.8% in April.

Read more in Daily Maverick: CPI slows to 6.3% in May, signalling the end of SA’s interest rate hiking cycle 

And the June read – to be unveiled on Wednesday – is expected to show CPI braked below 6.0%, within the 3.0% to 6.0% South African Reserve Bank (Sarb) target range. It was last below 6.0% in April 2022. 

The US Federal Reserve also paused its hiking cycle in June, which gives the Sarb room to do the same this week. The Sarb has had to more or less keep pace with the aggressive hikes in the US – which have taken the Fed’s key rate from almost zero to 5.0% to 5.25% – to retain the rand’s attractiveness to investors.

And the rand itself is currently trading close to 18/dlr after falling in late May to record lows of almost 20/dlr.

“We expect the MPC to keep rates unchanged at 8.25%, following the Fed’s pause at its June meeting. The Sarb’s decision will be supported by an easing in the domestic consumer price inflation outlook,” Investec economist Lara Hodes said in a commentary.

Still, analysts are divided over the decision that will emerge from the MPC’s three days of deliberations on Thursday.

Of 16 economists polled by Bloomberg, half see the MPC holding rates while half see it implementing another 25 basis point hike which would take the prime rate to 12%. 

Read more in Daily Maverick: Analysts less sure than a month ago that South Africa will hold rates 

Bloomberg notes that both Sarb governor Lesetja Kganyago and deputy governor Kuben Naidoo have recently said that “only once the MPC is confident that inflation is returning to the midpoint of the target range will it stop hiking rates”.

That would be 4.5% and CPI would almost certainly need to slow below that to give the MPC confidence that inflation is being contained.

South Africa has been in the throes of a cost-of-living crisis with food inflation taking a huge social toll, especially on poor and working-class households. So measures that douse the flames of inflation should be broadly welcome, though the Sarb’s hawkish take has not been without its critics.

This is always a difficult balancing act. The US and European central banks and their peers in developed economies have been hiking rates to lower inflation in the face of unemployment rates that are at or close to record lows. 

The contrast with South Africa could hardly be starker. The Sarb has been tightening against the backdrop of an unemployment rate that was almost 33% in the first quarter of this year, and an economy that is expected to barely grow this year.

Read more in Daily Maverick: SA’s unemployment rate rises to 32.9%, with 85,000 domestic worker and gardener jobs shed

Raising rates may help to ultimately throttle price pressures in South Africa by anchoring inflation expectations lower. But a case could be made that the trend is also throttling any threadbare prospects for economic growth while worsening the unfolding social crisis by burdening cash-strapped households with heavier debt loads. 

The MPC’s decisions are never easy. DM