Dark clouds gather for South Africa as reality sinks in

 ·18 Mar 2024

Local markets are under pressure as the reality sinks in that there won’t be any early cuts to interest rates – and inflation isn’t easing at the levels many had hoped.

The rand started the new week on the back foot, pushing towards the psychological R19.00 to the dollar mark as markets brace for tighter monetary policy in the coming weeks.

According to analysis from Investec chief economist Annabel Bishop, the rand has averaged R18.87 to the dollar in the first quarter of 2024 (so far), weaker than the R18.79 average in the final quarter of 2023.

This is largely the market pricing in “disappointing” signalling from the US Federal Reserve and other major central banks – including the South African Reserve Bank (SARB) – that tighter monetary policies are likely to persist for some time.

This has dashed hopes of an early start to a cutting cycle in interest rates, with US rates now only expected to come down in the middle of the year – at best – and local rates to come down there-after – likely only after the July meeting.

“The next FOMC meeting takes place this week, on 20th March, and markets essentially see no chance of a cut, with the Fed funds futures showing an essentially unchanged implied rate – while May’s meeting is only seen to have an 8% chance of a cut,” Bishop said.

“Earlier in the year, financial markets were factoring in higher probabilities for US interest rate cuts at the FOMC meetings in H1.24, with even June’s FOMC meeting now only seeing around a 50% likelihood of the first cut in the US occurring versus a prior 100%.”

For South Africa, Bishop said that the Forward Rate Agreement (FRA) curve has only fully factored in the first 25bp cut occurring in five months’ time (July) with September’s likelihood rising.

“(There is) no material chance of an interest rate cut currently seen in H1.24,” she said.

South Africa has an interest rate decision by the Monetary Policy Committee next week, but this is expected to be another hold.

“Cutting interest rates early in South Africa (ie, ahead of the US) would see the rand weaken materially, while the domestic currency is likely to strengthen materially if the US begins its interest rate cutting cycle before South Africa does, which is the current expectation,” Bishop said.

Red flags for inflation

Bishop said that the SARB has firmly communicated that it wishes CPI inflation to both reach 4.5% y/y and sustainably remain around this midpoint of the target before beginning to cut interest rates.

What is coming out this week, however, are the latest inflation figures, with economists and analysts expecting the print to be higher once again.

Investec economist Lara Hodes noted that current projections are for CPI to increase to around 5.4% for February, a slight increase from January’s reading of 5.3% y/y.

February recorded a petrol price increase of 75c/litre, adding upward pressure to the inflation outcome, she said.

Other inflationary pressures likely to reflect in a higher number include food inflation, which is likely to have picked up moderately, and readings on medical aid contributions, which are also recorded for the month.

The inflationary pressures are significant, with households and consumers financially constrained and relying on credit to fund an elevated cost of living.

BankservAfrica flagged these issues, as well as the high cost of South Africa’s business operating environment (among global issues) eating into profits and making it difficult to pay inflation-related salary increases.

According to Bishop, the prospects for lower inflation numbers are also under strain, with Investec now increasing its inflation forecast for the year upwards to 4.7%, from 4.5% before.

In addition, the bank does not see inflation dropping to the 4.5% SARB mid-point before the end of the third quarter (end-September).

March is already lining up for inflation pressure with the fuel price increase of R1.21/litre, underpinned largely by an increase in the global oil price, very likely to weigh on the month’s headline number.

Read: Interest rate trouble for South Africa

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