The South African Reserve Bank (SARB) is likely to follow the lead of the US Federal Reserve and keep interest rates on hold when it meets next week.
The SARB’s Monetary Policy Committee (MPC) will meet next Thursday, 23 November and decide on what to do with interest rates, with the repo rate currently standing at 8.25%.
The rand has been incredibly volatile, jumping from R18.80/$ to R18.20/$ yesterday, 14 November amid changing expectations around US interest rates, which Investec Chief Economist Annabel Bishop believes to have peaked in the current cycle.
“Global financial markets remain highly sensitive to the US interest rate cycle, and fluctuating expectations add to rand volatility. Most recently, cooling US inflation data for October (down from 3.7% to 3.2%) provided a boost to the rand, as the US dollar weakened,” Bishop said.
“The US inflation report was seen to reduce pressure on the US monetary authorities to increase interest rates again, and this will also be positive for SA.”
That said, Bishop warned that there is still a risk of another 25 basis point hike in South Africa and the USA.
“In particular, the differential between SA and US interest rates has narrowed further, to 2.75% from 3.00% in June, and 3.50% two years ago, which has added to rand weakness and so upwards inflationary pressures in South Africa,” Bishop added.
However, foreigners have been major purchasers of South African bonds this quarter, with R17.5 billion worth of purchases. This brings the year-to-date total to R12.4 billion after there were R5.1 billion worth of outflows in the first three quarters of the year.
Markets have increased their risk appetite amid the expectation that the US interest rate hike cycle has ended, boosting emerging market portfolio assets such as South African bonds.
Consumer Price Inflation in South Africa is also expected to moderate from the latest reading of 5.4% y/y – near the upper limit of the SARB’s target range of 3% to 6% – and average around 4.6% in 2024.
“This indicates no need for an interest rate hike in South Africa next week, and we do not expect one, particularly given the recent appreciation in the rand. However, the SARB will likely evince a hawkish tone overall,” Bishop noted.
“The focus, however, is on the US and its incoming economic data, particularly inflation and jobs data, while market players are building up their appetite for risk-taking, with further rand strength expected as no further US interest rate hikes occur.”