Interest rate pain for South Africa to stick around

 ·13 Jun 2024

Economists have pushed the start of the South African interest rate-cutting cycle back yet again, moving from a September call to the final meeting of the year in November.

This is a total shift from the initial optimism for several cuts at the start of 2024. At the start of the year, several economists expected interest rates in South Africa to be cut as early as March.

However, amid sticky inflation in both South Africa and the USA, Investec Chief Economist Annabel Bishop said that expectations are now that the first cuts for 2024 will take place only in November.

Although the South African Bank’s (SARB’s) Monetary Policy Committee does not necessarily follow the decisions of the US Federal Open Market Committee (FOMC), it does have a role to play in cutting interest rates.

Cutting before the US could see the rand weaken as investors seek higher, guaranteed returns. This could impact prices in South Africa, such as fuel and food, which could increase inflation.

In line with expectations, the FOMC decided to keep the federal fund’s target rate unchanged at 5.25%-5.50% in its latest meeting, highlighting that the US Fed is not ready to cut.

Fed Chair Jerome Powel said that it would not be appropriate to cut rates until there is confidence that inflation is moving sustainably to 2%, with US CPI coming out at 3.4% in May.

“The Fed funds futures showed market expectations rising to above 100% certainty for a 25bp cut in US interest rates in November on the inflation publication, but then this has dropped today as markets factored in the FOMC meeting statements,” said Bishop.

“The volatility in financial market expectations around the timing and speed of the anticipated US interest rate-cutting cycle has contributed directly to the volatility in the domestic currency this year.”

USD/ZAR (Source: Google)

“The perceived appropriate monetary policy path showed fewer cuts than in March, at 5.1% for the Fed funds rate at the end of this year (March 4.6%) and 4.1% at the end of 2025 (previously 3.9%), but unchanged at 3.1% at the end of 2026.”

In South Africa, market expectations on interest rates show the Forward Rate Agreement factoring in only one 25bps interest rate cut this year.

Inflation has remained above the SARB’s midpoint target of 4.5%, coming out at 5.2% in April.

Should the 25bp cut in November follow through, this would bring the repo rate down from its 15-year high of 8.25% to 8.00%.

“We continue to expect the first cut (25bp) at the November MPC meeting this year,” said Bishop. “The MPC does not necessarily follow the FOMC monetary policy path, but it does have some impact.”

“The next FOMC meeting is on 31st July, but no cut is likely in the US then.”

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