When to expect interest rates to turn in South Africa

 ·28 Jul 2023

The United States Federal Open Market Committee (FOMC) voted this week to hike US interest rates by 25 basis points – but indicated that this could be the point where it holds.

Given South Africa’s propensity to follow the US Fed’s rate decisions, this has led to some predictions from local economists that local rates could see another hike in the coming months.

However, among the market bulls, like Investec chief economist Annabel Bishop, the Fed’s move and subsequent commentary has instead cemented the group’s view that rates have peaked in South Africa – and now attention is turning to when the cycle will turn and become rate cuts.

Bishop noted that the rand’s response to the Fed hike was evidence of this.

“The FOMC communications leave some possibility for a hike in the Fed funds rate in September, but currently the markets have essentially priced in no change for the remainder of this year, and continue to see US interest rate cuts from next year.

The rand consequently has retained much of its recent strength, reaching R17.52 to the dollar this week, its strongest rate since February this year, she said.

“With the FOMC hiking by 25bp at the July meeting, it is not expected to do the same again at the September meeting, and market expectations see no further hikes in the current cycle for the US.”

In South Africa, the forward rage agreements have not priced in any further hikes in the repo rate this
year, with the essentially flat trajectory extending over Q1.24, Bishop said.

“However, as US interest rate cut expectations grow, South Africa is seen as cutting as early as mid-2024,” she said.

“The FRA curve currently shows expectations of a further 25bp cut in the repo rate by the end of 2024, making it a 50bp drop in interest rates in total, although market expectations are subject to rapid change.”

While the Reserve Bank brought some relief last week by holding on rates, it came with the big caveat from governor Lesetja Kganyao that the cycle was by no means over.

He said that future cuts could happen if inflation and other economic data are not hitting where they should.

Economists were divided leading up to the decision, with many expecting a further 25 basis point hike – and this has still not been completely wiped from expectations.

However, South Africa’s inflation landscape has continued to support the more bullish outlook. Not only did consumer price inflation fall within the SARB’s target range for June, but producer price inflation published this week also showed an enormous drop – beating market expectations by some margin.

According to economists at Nedbank, this is expected continue into July.

However, the prevailing economy and the performance of the rand remains key, with Nedbank noting that the local unit will remain under pressure as global risk appetite seesaws amid the global economic downturn and investors remain wary of South Africa.

As always, the risks remain to the downside, with the electricity shortage eroding domestic growth prospects and political rhetoric likely hardening ahead of next year’s elections.

“At the same time, load-shedding will continue to drive up local input costs, forcing companies to use diesel generators or incur the expense of installing alternative electricity sources. The end of the Ukraine/Russia grain export deal and the emergence of the El Niño weather pattern also pose upside risks to fresh produce prices,” it said.

Nedbank expects the Reserve Bank to maintain steady interest rates for the remainder of 2023, with the first cut in the first quarter of 2024 and the repo rate falling to 7.25% in November 2024.

Read: The Reserve Bank is walking a tightrope

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