Interest rate cuts in South Africa: All signs point to one month

The USA’s Federal Reserve will likely cut interest rates in September, boosting South Africa’s prospects of a rate cut in the same month.

As expected, the Federal Open Market Committee left the federal funds target rate unchanged at 5.25% to 5.5% in July.

Although it reiterated that greater confidence needs to be gained that US inflation is moving sustainably towards 2%, it did soften its tone, stating that Q2 inflation readings have added to its confidence.

Investec Chief Economist Annabel Bishop said that markets have increased the probability of a 25 basis points cut in US interest rates in September from 70% at the start of July to 116%.

The Fed funds future also shows a roughly 85% chance of a second 25 basis point interest rate cut in the US this year, likely in November.

The shift in sentiment was enough to strengthen the rand from R18.40 to R18.20, benefiting from the increased likelihood of a US interest rate.

“The rand remains volatile as financial market expectations have shifted around the timing and speed of the anticipated US interest rate cutting cycle, in turn contributing to rand volatility from an international perspective,” said Bishop.

She added that central bank communications have shifted in both South Africa and the USA towards dovish undertones, with markets fully factoring in a 25 basis points cut in South Africa’s repo rate.

This follows a substantial shift lower in July’s Monetary Policy Committee (MPC) Inflation rate.

South Africa’s interest rates are heavily influenced by what happens in the USA. A cut before the USA could result in a weaker rand, as investors are drawn to high, safer returns from the USA.

Despite South Africa’s myriad of challenges, the primary reason for the rand’s weakness has been high interest rates in the USA.

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

With the USA set to cut rates in September, it gives the South African Reserve Bank’s MPC greater room to cut the repo rate from its 15-year high of 8.25%

Following the MPC’s July meeting, several economists brought forward their expectations of an interest rate cut in South Africa after two of the six MPC members voted for a 25 basis point cut, while the remaining members called for a hold.

Bank of America (BofA) brought forward its expectations of a cut from January 2025 to September 2024.

With inflation revised down below the SARB’s 4.5% target from Q4 2024 and into 2025, Bofa said that the central bank could move from its current restructuring stance to a neutral one.

Moreover, the rand has been buoyed by the formation of the Government of National Unity (GNU), spearheaded by South Africa’s two largest political parties – the ANC and DA.

BofA expects the SARB to cut rates by 25 bps points in September, November, January and March, bringing down the repo rate to 7.25%.

BofA did, however, stress that the SARB could remain cautious due to concerns about the pace of cuts globally, specifically in the USA, and the potential impact on the rand.

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