Kick in the teeth for interest rate cuts in South Africa
South Africans may have to wait longer for interest rate cuts, with the South African Reserve Bank (SARB) likely to follow moves in the USA.
Bank of America (BofA) economist Tatonga Rusike projects that the US Federal Reserve will not cut rates in 2024 following June’s Federal Open Market Committee (FOMC) meeting.
BofA is pushing its first rate cut call from the USA out from September 2024 into January 2025.
“The median FOMC member now forecasts one rate cut this year, down from three in March. Our US team projects one Fed rate cut this year, in December,” said Rusike.
In Rusike’s view, it is unlikely that the SARB would cut before the US Fed.
“We now assume cuts of 25bp each will start from January 2025, with a cumulative 100bp in January, March, May and July.”
The repo rate will thus remain unchanged from its 15-year high of 8.25% in 2024.
However, other economists and analysts are more optimistic about a change in interest rates this year.
Sanisha Packirisamy, Economist at Momentum Investments, said that the Monetary Policy Committee (MPC) could possibly cut interest rates as early as September 2024.
“Factors influencing our projection include the likely moderation in inflation expectations, the expected moderation in headline inflation, ongoing rand strength, a faster-than-anticipated moderation in food inflation, relatively stable international oil prices and interest rate easing by some major global central banks,” Packirisamy said.
Nedbank economists are also pencilling in 25 bp cuts in September and November, while Investec’s chief Economist, Annabel Bishop, expects the cutting cycle to start in November.
Rand fears
BofA is also bearish on the rand for now, given the short-term political risks related to the Government of National Unity (GNU) and the global backdrop.
The ANC formed a GNU after failing to get a majority in parliament for the first time in the democratic era, garnering only 39.8% of the vote.
The DA anchors the GNU after receiving 21.8% of the vote.
However, the two parties are still negotiating over cabinet positions despite President Cyril Ramaphosa’s inauguration last week.
The Government of National Unity contains 10 separate parties but primarily got its votes from the ANC and DA, who have been stuck in tense negotiations over cabinet positions.
However, the weaker USD should lead to a stronger rand than forwards imply from Q4.
Positive signs ahead
Despite the risks, BofA does see several positives in the GNU.
“Potential benefits of the GNU could be better accountability, with strengthening of existing reforms in power supply and logistics as the priority, fewer SOE bailouts, more private sector participation, and fiscal consolidation materialising in 2026.”
BofA maintains its 1.3% growth forecast for 2024 despite the 0.1% contraction in Q1.
Q2 is expected to see a bounce back amid reduced load shedding.
If sustained for the rest of 2024, the improved power supply would be a major structural improvement.
The reasons for the reduced power cuts include the increased supply of 5,5000 MW of renewables, helping to ease demand, better plant maintenance and the return of units at the Medupi and Kusile power stations.
“GDP growth could strengthen towards 2% over the medium term on stronger investment and consumption spending. Power supply and logistics reforms are a top priority.”
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