Turn for interest rates in South Africa hits the rand
The rand’s strengthening momentum has been broken by a more optimistic South African Reserve Bank. Markets now expect a cut in interest rates at the central bank’s next Monetary Policy Committee (MPC) meeting.
The SARB’s MPC voted to hold rates at 15-year highs last week, keeping the repo rate at 8.25% for the seventh meeting in a row.
While the hold was widely expected, the fact that it was not a unanimous vote—with two members voting for a 25 basis point cut—showed a significant turn in sentiment around rates, spurring optimism that the next move would be a cut.
Key economists see the next meeting in September 2024 being a 25 basis point cut for rates, likely followed by another 25 basis point cut at the final meeting in November.
This broadly reflects South Africa’s forward rate agreement (FRA curve), which is now factoring in almost an 80% chance of a 25bp interest rate cut at the September MPC meeting and just above a 40% chance of another at the November MPC meeting.
However, while the looming rate cuts will bring much-needed relief to countrywide households, they will also likely put pressure on the rand.
According to Investec chief economist, Annabel Bishop, this is because of the proximity to the US Fed’s expected rate cut, also pencilled in for September.
Bishop previously noted that a delay in interest rate cuts in South Africa, and a quickening in the start of the US interest rate cutting cycle would widen the differential between South African and US interest rates, which would add to rand strength.
The rand weakened over 2022 and 2023 as the US hiked its interest rates more quickly with its monetary policy meeting every six weeks, and South Africa’s MPC meeting every two months
This translated into the US hiking by 50bp more than South Africa in total.
The rand weakened from R14.50/USD in early 2022 to R20.00/USD in 2023 but pulled back to towards R18.00/USD at the end of the US rate hike cycle, and then the expectation of US interest rate cuts to near R17.80/USD momentarily.
“However, the MPC’s communication that it could cut at the next MPC meeting has reversed the rand’s strength, with the domestic currency weakening to R18.37/USD last week, today reaching R18.33/USD, undermined by SARB dovishness,” Bishop said.
“The longer South Africa delays its first interest rate cut, the likely stronger the rand—which is positive for inflation, as rand appreciation is a significant contributing factor to lowering inflation, particularly when international commodity prices are not rising.”
The opposite is also true, which is why most market commentators have noted that the SARB will only follow, not lead, the US cutting cycle. Cutting before the US Fed would shrink the differential, putting more pressure on the rand and putting inflation in a bad spot.
Bishop said the new administration’s ongoing unity in governing South Africa has provided some positive sentiment for the rand, which aided it in June and into July, but it has not been the main driver.
The rand is still expected to strengthen into the quarter, but much will depend on the timing of both US and South African interest rates, she said.
By 14h00 on Monday (22 July), the rand was trading at these levels against the major currencies:
- ZAR/USD: 18.26 (-0.11%)
- ZAR/EUR: 19.86 (-0.25%)
- ZAR/GBP: 23.60 (-0.04%)
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