Mood shifts for interest rates in South Africa

 ·9 Apr 2024

Markets are expecting a later start to the interest rate cutting cycle in the United States and also South Africa, which is causing some mild volatility in the rand as the mood shifts from hopeful to pragmatic.

The South African rand is currently enjoying some strength, but this could be short-lived as markets are not holding out much hope for interest rate cuts anytime soon.

While the rand reached R18.48 to the dollar in March—a much stronger position than the R19.25/$ position it started the month in—it has since managed to hold around R18.60 to the dollar as risk sentiment improved.

According to Investec chief economist Annabel Bishop, the volatility seen in March was driven by market expectations around interest rates in the United States, which fed into other markets, including South Africa.

March started off with markets anticipating a US interest rate cut in June 2024, with probability sitting extremely close to 100%. By the end of the month, the probability for the cuts had halved to around 50%, as worries over inflation and a hawkish tone from the US Fed pushed expectations back.

As things currently stand, only September is seen as 100% certain for a cut, meaning the start of the cutting cycle is likely to come much later than many had initially expected.

This sentiment has spilled over to South Africa.

Bishop said the volatility in US interest rate expectations has contributed to the modest volatility in the rand, as the US dollar has softened and gained somewhat. However, she added that the volatility overall is mild and not of material concern.

“The push-back in US rate cut timing expectations has come as the US core PCE deflator remained at an uninspiring 2.8% y/y in the latest February outcome, unchanged from the previous month, and in line with market expectations.

“The core PCE deflator is the key inflation measure US monetary policy officials watch in their implicit inflation targeting. The PCE deflator measure rose to 2.5% y/y from 2.4% y/y in January, also not inspiring market confidence,” she said.

This week in the US, CPI inflation measures are due, with the core CPI inflation reading expected at 3.7% y/y and CPI inflation rising to 3.4% y/y from 3.2% y/y, all dissuading market expectations of a quicker cut cycle, holding back the rand.

The next FOMC meeting is on 1 May, with only a paltry 6% probability of a US interest rate cut.

“Markets have been disappointed by the FOMC’s communications from the point of view of being supportive of rate hikes. Instead, Chair Powell is dismissive of any short-term need for a cut, which has weakened market hopes,” Bishop said.

The Fed is seen to be sticking to three 25bp cuts this year, with inflation seen to be “bumpy”, as the start of the year showed some firming in inflation data, adding to volatility in market expectations for rate cuts.

In South Africa, while analysts and economists anticipated a mid-year cut to interest rates and between 75bps and 100bps to come off the rate this year, these projections have already been dashed.

Falling in line with the US cycle, markets do not expect South Africa to cut rates ahead of the US, thus, the local cutting cycle has also been pushed back to later in the year – as far back as September.

In addition, forecasts have dropped from a 75bps cut in 2024 to only a 50bps cut.

Inflation has also been a thorn in the side of local rates, with the average for 2024 also revised upwards from 4.5%—the current mid-point of the SARB’s target range—to 4.7%.

There are also murmurings of the Reserve Bank looking to revise its target range before 2025 – moving it lower to 3% to 5%, making the fight to get inflation to settle at acceptable levels even tighter.

Read: Big interest rate shift on the cards for South Africa

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