Boost for interest rate cuts in South Africa

 ·1 Feb 2024

Interest rates in the USA are likely to be cut in the middle of 2024, with the South African Reserve Bank (South African Reserve Bank) expected to follow suit.

Yesterday (31 January), the Federal Open Market Committee (FOMC) kept the federal funds target rate unchanged at 5.25% – 5.50%. It said that inflation is too high, with the process of bringing it down not yet assured and the future unclear.

The Fed did, however, note that inflation has eased from its highs without a significant increase in unemployment. Although this is good news, it indicates that restoring price stability is crucial.

Investec Chief Economist Annabel Bishop said that the rapid tightening of the US interest rate cycle has been felt, as the housing market is seeing subdued activity levels, whilst high borrowing costs suppressed business fixed investment.

Despite the FOMC stating that it has likely hit the peak of its tightening cycle and that it will probably start dialling back on its policy restraint later this year, it warned the US economy had surprised forecasters in many ways since the pandemic and that the progress of hitting its 2% inflation goal is not assured.

In response to the news, the rand increased to R18.58/$ before retreating to R18.73/$, as markets have factored in a May 2024 date for the first rate cut in the US.

Rand/US Dollar

“The market expectations for the first FOMC cut are unlikely to change materially, i.e. be brought forward to the next (20 March) meeting, although US data releases in the interim will remain key for markets,” Bishop said.

The Fed also stated that reducing policy too soon or by too much could reverse the progress that has been made in decreasing inflation.

“It remains likely the FOMC will not cut its interest rates before May at the earliest, potentially rather at its June meeting, and for SA, the SARB is unlikely to cut before July, with the FRA (Forward Rate Agreement) curve aligned to a July cut (all -25bp),” Bishop said.

Expert consensus

Bishop’s outlook is broadly in line with other economists who work in the banking sector.

The Nedbank Group Economic Unit expects the first 25 bps cut during the May meeting but did stress that this could be delayed to July if the rand weakens ahead of the local elections, the USA relaxes its monetary policy later than expected and geopolitical tensions escalate.

Nedbank thus expects either 75 bps (July cut) or 100 bps (May cut) worth of cuts across the whole of 2024.

Bank of America expects the first cut to come in July, with roughly 125 bps points worth of cuts between 2024 and 2025.

However, it warned that this decrease will pale in comparison to the 475 bps worth of increase since November 2021, when the SARB started increasing rates following the Covid-19 pandemic.

Read: The best case scenario for South Africa in 2024

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