Another blow for interest rates in South Africa

The latest minutes from the United States Federal Open Market Committee (FOMC) have all but cemented a longer hold on interest rates in South Africa at 14-year highs, with the market now expecting rate cuts in the world’s biggest economy after the middle point of the year, possibly only in Q3.

According to Investec chief economist Annabel Bishop, the FOMC minutes release caused some consternation for the rand, even after the better-than-expected 2024 Budget brought some relief and strength to the local unit.

The rand then strengthened to R18.77/$ following the Budget but then quickly retreated back closer to R19.00/$ after minutes from the FOMC’s January meeting showed that US interest rate cuts are not imminent, strengthening the dollar.

Participants remained attentive to inflation risks and worried that inflation was still above the committee’s longer-run goal.

Participants were also concerned that price stability could stall, especially if aggregate demand strengthened or supply-side healing slowed more than expected.

Participants said that the uncertainty associated with how long the restrictive monetary policy stance needs to be maintained, with markets none the wiser over when the fed funds rate will be cut.

Most of the market (93%) expects the first cut to come in June, with a 25 basis point cut expected, with a 100% chance of a 25 basis point cut in July and a 0% chance of a further 25 basis point cut.

“We expect this is when the first SA interest cut will occur as well, although South Africa remains likely to only make its first interest rate cut after the US has begun its interest rate cut cycle, and if US rate cuts are delayed, so will South Africa’s be to later in Q3.24,” Bishop said.

“That is, decreasing South Africa’s interest rates before the US cuts would reduce the differential between South Africa’s and the US’s interest rates further, which would see additional rand weakness and so place upward pressure on South Africa’s inflation rate.”

The South African Reserve Bank has stated that it will not drop interest rates until CPI reaches its targeted midpoint of 4.5%.

Markets still expect three 25 basis points cuts in the US this year, with a fourth lined up for January 2025.

The FOMC minutes were also not hawkish, with some participants conceding the downside risk to the economy associated with maintaining an overly restrictive stance for too long.

Read: Bad news for interest rates as hawks circle the Reserve Bank