Good news for interest rates and the rand in South Africa
Weak payroll data out of the United States this past week has put the US Fed on course for a possible rate cut this month, boosting the rand and increasing the chances for another cut back home.
Jobs data from the US surprised on the downside last week, with non-farm payrolls at a 22,000 rise, causing analysts to take a position of a 100% chance of a cut to interest rates in September.
This also had the effect of weakening the dollar, which helped the rand strengthen to R17.52 against the dollar on Friday, testing the key resistance level of R17.50/$.
According to Investec Chief Economist Annabel Bishop, the 22,000 rise in jobs was well below forecasters’ expectations of 75,000, pushing market expectations that a 25 basis point cut in US interest rates is on the way.
A further 25 basis point cut is also being pencilled in for October, with another also being seen likely in December, dampening the dollar even further.
Bishop noted that this was enough to push the rand towards the R17.50/$ resistance level, but the local currency struggled to push through.
If the US interest rate cuts become a reality in the remainder of the year, this could be the injection the rand needs, she said, adding that the local unit has also seen some relative stability against the pound and the euro.
“The US and South Africa are both still in interest rate cut cycles, but the US is set to cut its interest rates significantly more than the Reserve Bank in South Africa this year, and so the rand has gained, and this may allow for some further rand strength,” Bishop said.
This view is shared by David Rees, Head of Global Economics at Schroders, who sees the way cleared for multiple cuts by the US Fed in the final months of the year.
“But while the odds are now stacked firmly in favour of imminent rate cuts, the Fed will need to tread carefully. After all, most other labour market measures have held up well and changes to immigration policy are likely to restrict the supply of workers in the future,” he said.
Even though the Fed is highly likely to cut rates this month, Rees cautioned that the market may be pricing in too much optimism in longer forecasts.
“With the broader economy seemingly rebounding now that the most pressing policy uncertainties have passed, it may not be long until hiring picks up again.”
Local interest rates also get some good news
The relatively aggressive rate-cutting in the United States also opens the door for more interest rate cuts back home.
While the South African Reserve Bank (SARB) does not strictly follow the US Fed’s lead in cutting or hiking rates, the interest rate differential between the two countries is a crucial factor at play.
The SARB is unlikely to cut too aggressively and narrow the differential, as this has an impact on the value of the rand. However, if the US Fed cuts, there is more room for the SARB to cut too.
Given that context, Bishop said that a 75 basis point cut in the US over the coming months could signal another 25 basis point cut by the SARB—either in September or in the final meeting for the year in November.
The US Fed reviews its monetary policy every four weeks, while the SARB does so every six weeks.
“South Africa sees its monetary policy meeting as well this month, the day after the US interest rate announcement, with the Reserve Bank expected to cut South Africa’s repo rate by 25bp again,” Bishop said.
The Investec chief economist added that financial markets also now expect a 75bp cut in the repo rate out to September 2027, adding the caveat that the Forward Rate Agreement (FRA) curve is changeable.
The FRA curve has fully priced in a 25bp cut for the remainder of this year, but not a second 25bp easing, with near a 50% chance instead, Bishop noted.
Other economists have been less bullish in their expectations, with those with a pessimistic slant seeing a hold on interest rates in South Africa until 2027, with no movement coming in the September meeting.
Indeed, the interest rate forecast is still susceptible to shocks in the economy, as well as the Reserve Bank’s move to target 3% inflation.
While this will be generally more positive for interest rate moves over the long term, it typically takes two years for the economy to stabilise around a new target.
During that time, inflation shocks—like Eskom’s massive price increases and global market dynamics—might make that more challenging.
The SARB and National Treasury have seemingly got on the same page regarding the inflation target and will make an announcement on the path forward when it has been finalised.
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