Interest rate cuts in South Africa face another hurdle

 ·28 Feb 2024

With South Africa’s interest rates already unlikely to come down before those in the United States, a worrying “debate” has emerged where some have floated the possibility that rates could be on hold until 2025.

According to Investec chief economist Annabel Bishop, the pressure on the rand at the end of last week – keeping the currency above R19 to the dollar – has persisted into the new week, with markets still processing the sentiment from the US FOMC minutes that there is no rush to cut rates.

While this sentiment feeds into the “higher for longer” narrative around interest rates in the US – and, subsequently, South Africa – most market analysts still expect the rate-cutting cycle to start in July.

However, Bishop said that debate has now arisen on whether a cut could be delayed until after November’s US elections – or even into 2025.

She noted that the ongoing volatility in market expectations around US interest rate cuts has led to marked volatility in the rand, as well as some in the US dollar, but with a trend of overall weakness for the domestic currency.

“In fact, such is the volatility on US interest rate cut views – particularly after the latest US inflation figures which showed underlying notable price pressures – that debate has included the possibility of another hike as well,” she said.

Bishop said that higher US interest rates are negative for commodity prices (lowering economic demand and so too commodity prices) as well as being generally negative for emerging market currencies – the rand sadly falls into both of these categories.

However, while extended holds or hikes on US interest rates have entered the debate, the market is still not pricing this as an actual possibility.

“Instead, market commentators are discussing various options versus firm views previously of an early rate cut cycle,” Bishop said. “The uncertainty has created negativity.”

Financial markets currently show certainty (a 100% chance) of one 25bp cut to interest rates in July and near certainty of another in September, Bishop said.

“The narrative overall is currently for a delay in the rate-cutting cycle in advanced economies – but it is still early in the year, and the middle of Q2.24 could instead see a different narrative emerging, if not earlier, more supportive of US rate cuts.

“Indeed, this is our expected case, and we believe that market sentiment will turn, making midyear interest rate cuts likely both in the US and in SA – although SA will most likely cut after the US, once CPI inflation sustainably regains 4.5% y/y,” the economist said.

Thabani Ndwandwe, Head of Risk at Standard Bank South Africa, said that interest rates could start to come down sooner in the country, even as early as May.

“(South African) taxpayers may see some respite, but only by 100 basis points for this year,” he says,” he said.

Read: Another blow for interest rates in South Africa

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