What interest rate cuts in South Africa will mean for the rand

The South African Reserve Bank (SARB) is widely expected to cut interest rates in South Africa this month, which could be good news for the rand.

The SARB’s Monetary Policy Committee (MPC) is expected to cut rates when it meets in two weeks.

This comes from an improved inflation outlook, where inflation is expected to drop by the target of 4.5% in the coming months.

Moreover, the rand has also strengthened against the dollar in recent months following the formation of the Government of National Unity (GNU) and weak economic data from the USA.

The US Federal Reserve is also expected to cut interest rates before the MPC due to reducing American inflation and relatively poor job numbers. This will give the MPC room to cut without impacting the interest rate differential.

In the last MPC meeting, two of the six members voted for a 25 basis point cut, leading many analysts and economists to raise their expectations of a September cut.

Bank of America, Investec, Standard Bank, Nedbank and the Bureau for Economic Research (BER) all expect the MPC to lower the repo rate from its current 15-year high of 8.25%.

Some also expect a further 25 basis point cut in November, followed by another 50 basis point cuts in the first half of 2024.

“As welcome as the rate cut will be to anyone paying off a home, car, or student loan and those with credit card or store debt, it also has other implications,” said Harry Scherzer, CEO of FutureForex.

“At least some of these implications will impact individuals and businesses moving large sums of money internationally.”

For instance, an interest rate cut could weaken the rand as investor money goes out of government bonds. However, this is not specific to the rand, as interest rate cuts hit every currency globally.

The US Dollar has also weakened due to expectations of an interest rate cut in the coming weeks.

This drop in the US Dollar has benefitted South African consumers, particularly at the petrol pumps.

Scherzer added that it will also be interesting to see how rate cuts between the two countries affect the rand and dollar exchange rates.

“As interest rates fall in South Africa and worldwide, the economy could also be positively affected,” said Scherzer.

“If, as increasingly seems likely, central banks have managed to stabilise inflation while avoiding a global recession, then they may well be more inclined to keep cutting them.”

“If that’s the case, investors will likely turn away from the relative safety of government bonds and towards riskier asset classes in the quest for higher yield.”

This could result in investors backing South African technology startups, infrastructure and other asset classes, boosting the economy.

The economy may also reap the rewards of higher consumer spending as servicing debt becomes more affordable.

“If this results in significant economic growth, the rand could strengthen further,” said Scherzer.

Still a way to go

Although the rand is now trading at R17.68/$, which is an improvement from its over R19.50/$ seen a year ago, the rand is still roughly 20% weaker than the level seen in August 2022, where the rand traded between at roughly R14.50/$.

In addition, the latest Big Mac Index, which has become the global standard for purchasing power parity and compares the price of a McDonald’s Big Mac across the world, shows that the rand has an implied exchange rate of R9.12/$.

The between this and the actually exchange rate, R18.19 at the time of the study (31 July), means that the rand is 49.9% undervalued – the fifth most on the world.

Read: South Africans are still living through a recession – but there are signs of life