What to expect for interest rates in South Africa this month

 ·9 May 2024

A delay in interest rate cuts in the United States is pushing risk-averse sentiment in emerging markets, putting pressure on the rand and capital flows to South Africa.

The now-cemented narrative of “higher for longer” for rates has pushed out local expectations for interest rate cuts as well, which is contributing to building of tension in the markets, which will be ready to explode once the cutting cycles begin.

In a complete shift from sentient just a few months ago, markets no longer anticipate an ‘early’ start to the rate cutting cycle in the US, with expectations for a Q4 2024 start at the very soonest.

According to Investec chief economist, Annabel Bishop, global financial flows into emerging markets like South Africa will benefit the rand when the US interest rate cut cycle eventually begins, with historically very substantial rand strength being seen.

“We expect the rand to pull towards its PPP (level) of R15.00/USD over the next few years,” she said.

South Africa’s interest rate cycle has been delayed due to stubborn inflation outcomes, she noted, with the recent Monetary Policy Review from the South African Reserve Bank (SARB) highlighting that it currently sees the start of the local interest rate cut cycle well into 2025.

“This prompted some earlier rand strength as the delay of the start of the South African interest rate cut cycle well beyond the start of the one in the US will widen the interest rate differential between the two countries, benefiting the rand,” Bishop said.

However, she noted that the domestic currency will remain volatile, sensitive to US data releases, and any change in US interest rate expectations, along with other global financial market developments, which tend to be the main driver of the rand.

According to the SARB, expectations on domestic policy moves and rate cuts have evolved in line with global markets.

At the end of 2023, forward rate agreement (FRA) rates indicated that South Africa’s policy rate would be lowered in the first half of 2024. However, the FRA curve has since shifted higher, reflecting the slowing pace of domestic disinflation and implying that rate cuts would be deferred to early 2025.

“This contrasts with the surveyed expectations of analysts, which indicate two to three rate cuts in the second half of 2024,” the bank said.

While some economists, such as those at Nedbank, still anticipate at least two rate cuts in 2024 – 25 basis points in September and again in November – projections that the central bank will continue to hold on rates for the rest of the year are also starting to emerge.

The Reserve Bank said that markets have aligned more closely with central bank views that uncertainty about the pace of disinflation remains, and are now pricing in fewer rate cuts, spread further out in time.

“At the same time, the conviction has strengthened that economies will not slow sharply but instead will achieve a ‘soft landing’.”

The SARB’s Monetary Policy Committee (MPC) will meet at the end of the month just after the election, with the prevailing view that it will be another hold on rates.

Read: Tough news for interest rates in South Africa

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