Interest rate relief for South Africa is coming

With local and global inflation looking like they are on a downward trend, South Africa is likely to follow other countries in cutting interest rates this year.

According to Investec chief economist Annabel Bishop, the United States is likely to make its first interest rate cut in the first half of 2024, with March being identified as the first month this could likely occur.

This should provide a boost for the rand, which is currently only one of the most important factors being watched for local inflation moves.

The minutes of the US Federal Open Market Committee (FOMC) meeting for December, published late last week, provided caution on the interest rate outlook for the States, with the group stressing “the importance of maintaining a careful and data-dependent approach to making monetary policy decisions”.

However, despite markets being disappointed by the lack of a clear path forward, they have priced in a 100% chance of close to two 25bp interest rate cuts in the US by May 2024 – on the basis that the minutes underscore the expectation that the next move will be a cut.

While not following the FOMC directly, South Africa’s Reserve Bank tends to closely tie to the moves in the US, largely because of the significant impact these rates have on global markets (and the rand and subsequently inflation).

Bishop noted that the SARB’s monetary policy committee (MPC) has communicated its preference for CPI inflation to consistently average around 4.5% y/y before it starts cutting rates, but added that the central bank will also likely look to the differential between South African and US interest rates to widen first.

“Should the US cut interest rates in H1.24, with March currently viewed as the first month this could likely occur, the rand could see some strength as the differential between US and SA Bank rates widens if SA does not cut,” Bishop said.

This would also boost the rand, which the SARB will also be looking out for to further justify rate cuts, she said.

The economist said that the inflation outlook for South Africa in 2024 is bumpy, with a slight increase expected in the early months, followed by declines later. Overall, however, the trajectory is down, with markets anticipating an average of 4.5% for the year.

The consistent lowering of inflation that the SARB is looking out for will likely be in H2.24, Bishop noted.

“While inflation is likely to temporarily return to around 5.8% y/y in January’s outcome for this year, it should drop to near 5.3% y/y in February, and 4.7% y/y in March, as an overall downwards trend is maintained, allowing for interest rates cuts this year,” she said.

While risks to the inflation rate are still present, the opposite is also true – and there is also a chance that the SARB could cut interest rates earlier if the bank is confident that inflation is under control.

“It is too early to tell with 100% certainty if this will be the case yet,” Bishop said.

Regardless, no further interest rate hikes are expected in South Africa under the current forecasts, with rate cuts anticipated by 2h24.

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