Interest rate relief coming sooner than expected in South Africa

 ·23 Jul 2024

Bank of America (BofA) has pushed forward its expectation over when South Africa’s interest rate cutting cycle will begin.

In line with BofA’s and the broader market’s expectations, the South African Reserve Bank’s (SARB’s) monetary policy committee (MPC) kept the repo rate at 8.25% when it met last week.

However, minority voters for a cut emerged earlier than BofA’s September baseline.

Four committee members called for a hold, while two voted for a cut of 25 basis points.

“This represents a departure from last year when the policy rate was kept unchanged with unanimous votes. The monetary policy outlook is getting interesting again,” said BofA.

SARB inflation forecasts have been revised down below the 4.5% target from Q4 2024 and into 2025, meaning that monetary policy should move to neutral from its current restrictive stance.

Although inflation expectations are not yet at 4.5% levels, they are still trending downwards.

In addition, following the formation of the Government of National Unity (GNU), the rand has been stronger, closer to R18 per USD from R19 in the last MPC meeting.

“Domestic inflation data is pointing to cuts sooner rather than later,” said BofA.

“We now expect SARB to start cutting in September by 25bps, followed by November, January, and March – totalling 50bps in 2024 and a further 50bps in early 2025.”

“We also think the latest SARB forecasts open up the possibility of an outsized cut in September (say 50bp), should the Fed cut then, and a lower terminal rate of potentially 7% as early as 1Q 2025.”

This marks a significant shift in BofA’s thinking. The company previously believed that the cutting cycle would only start in January 2025, with a 25bps cut. This would then be followed by cuts in March, May, and July, leading to a cumulative 100bps of cuts.

That said, BofA noted that the SARB could be cautious due to concerns about the pace of cuts globally and the potential impact on the rand.

“Markets are pricing multiple US Fed cuts this year starting in September, although our US economists are not convinced so far, given the economy is not cooling as yet,” said BofA.

Rand impact

Investec Chief Economist Annabel Bishop also noted that the rand could weaken if the SARB cuts rates soon.

Bishop previously said that a delay in interest rate cuts in South Africa and a quickening at the start of the US interest rate cutting cycle would widen the differential between South African and US interest rates, adding to the rand’s strength.

The rand weakened from R14.50/$ in early 2022 to R20.00/$ in 2023 as the US Federal Reserve hiked its interest rates far quicker than South Africa.

The rand was able to pull back to around R18.00/$ at the end of the US rate hike cycle, with the expectation of US interest rate cuts to push it to R17.80/$ 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/$ last week, today reaching R18.33/$, 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.”


Read: Allan Gray warning for pensions in South Africa

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