Tough news for interest rates in South Africa

The US Federal Reserve has voted to keep interest rates on hold, cementing the “higher for longer” narrative and likely pushing South Africa’s cutting cycle back further.

Positively for South Africa, the US dollar weakened on the announcement, benefitting emerging market currencies like the rand.

The rand strengthened on Thursday and Friday, firming to R18.54/$ against the dollar after the Fed kept its benchmark rate unchanged and reiterated inflationary concerns.

“The local currency was also bolstered by better-than-expected vehicle sales data. Further support stemmed from the improvement in the country’s electricity situation with load-shedding being suspended for over 35 days,” said Nedbank.

While Fed Chair Jerome Powell completely ruled out interest rate hikes, he acknowledged that rates may need to remain higher for longer, bringing some certainty on the path forward.

According to Adriaan Pask, CIO at PSG Wealth, the US Fed is in a difficult position. Cutting rates prematurely risks “letting the inflation genie out of the bottle,” but keeping rates too high for too long means more severe economic pain down the road, he said.

For instance, Pask said that the higher interest rate environment in the US is yet to bite, and the economic strain from the 2022/23 hike cycle will still filter through in 2024.

Locally, however, households are already feeling the pain from the persistently high rate cycle, with South Africans being forced to turn to their credit cards to make ends meet as the banks close the taps on lending.

Banks have tightened their lending conditions to individuals due to increased defaults on loans at higher rates, with Nedbank also attributing the tough environment to higher inflation—still sitting outside the Reserve Bank’s 4.5% target—and high levels of unemployment.

The Fed’s position is increasingly hawkish. Its committee stated that it does not consider it appropriate to cut interest rates until it is more confident that inflation is moving sustainably towards the 2% target.

In South Africa, this has been the message from the Reserve Bank at all of its meetings since it first started to hold on rates in May 2023. Reserve Bank governor Lesetja Kganyago has repeatedly stated that the bank will not make policy moves until inflation is under control.

With the Fed keeping rates on hold, this makes it even more likely that rates in South Africa will stick at 15-year highs for longer, with another hold expected at the Monetary Policy Committee meeting scheduled for 30 May.

Nedbank has remained fairly optimistic that rate cuts will come in 2024, projecting a 25 basis point cut each at the September and November meetings. However, other analysts have started ruling out rate cuts at all this year, moving the start of the cutting cycle to 2025.

Read: New homebuying trend hits South Africa’s middle class as interest rates bite