Bad to worse for interest rates in South Africa

 ·24 Apr 2024

With economists already factoring in the possibility of no interest rate cuts in South Africa in 2024, markets are starting to question whether the same will be true for the United States – which would push local prospects back even further.

George Brown, Senior US Economist at Schroders, says that the US Federal Reserve is unlikely to cut rates as previously expected in June, and it is now a close call whether it will cut rates at all in 2024.

“It is now a close call whether any easing materialises this year. Any cuts will be conditional on there being conclusive evidence that inflation is converging back to target,” he said.

“Not only will this require a softening in sequential inflation, it will also hinge on labour market conditions coming into better balance.”

Brown noted that the question was raised after core inflation in the US surprised to the upside in March for the third consecutive month. Futures markets now point to fewer than two rate cuts in 2024, having priced in as many as six or seven back in January.

Expectations are for a possible 25 basis point cut in the US in September, and again in December and March 2025. However, risks – such as the US election in November and conflict in the Middle East – could see this pushed out further.

“The change in market expectations has not been met with any pushback from Fed chair Jerome Powell. Following the March inflation print, he admitted it is ‘likely to take longer than expected’ for the central bank to have the confidence to start easing policy.

For South Africa, in particular, there doesn’t seem to be much hope on the horizon anytime soon, he said.

“It seems unlikely that (South Africa’s) rates will be cut anytime soon amid a perfect storm of sticky domestic inflation, uncertainty about the outcome of the general election and dislocation in global markets following concerns about inflation in the US and tensions in the Middle East.

“Higher for longer local interest rates will remain restrictive for activity, meaning that economic growth in South Africa is likely to suffer,” he said.

Expectations for interest rate cuts have gone from bad to worse with each passing month in South Africa. At the start of the year, markets were hopeful of a 100bp cut in 2024 starting around March. However, this quickly became a “mid-year” estimate of maybe 75bp, before being pushed back later and the quantum lower.

The most hopeful or optimistic models point to two 25 basis point cuts coming in September or November (50bp) – while the most pessimistic only see inflation reaching the South Africa Reserve Bank’s target range (4.5%) in the middle of 2025.

The central bank has also doused any flames of hope for interest rate cuts any time soon.

During its six-monthly Monetary Policy Review, the bank said that the path back to the 4.5% midpoint of the target band is likely to be “bumpy and protracted” and that the relatively slow disinflation seen up to now is “likely to keep rates at current levels for longer than previously expected.”

Parallel to this, the SARB is also keen on targeting an even lower inflation rate, which it says would give South Africa a permanently lower inflation profile and reduce borrowing costs than its current target band.

Governor Lesetja Kganyago, who has heralded a point target of 3%, has previously said the bank and the National Treasury are working on a framework that will decide on the form of the new target.

Should a new, lower, target be adopted before the end of the current financial year (March 2025), the path to rate cuts may take even longer.

The Reserve Bank’s next Monetary Policy Meeting is scheduled for 30 May 2024, where the committee is widely expected to hold rates at 8.25% – the same position it has held for the past year.

Read: Reserve Bank adds new measures that will impact interest rate decisions in South Africa

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