Multiple interest rate cuts still on the table for South Africa

 ·17 Jan 2025

Increasing oil prices and the weak rand are bad news for South Africa, but the South African Reserve Bank still has scope to cut interest rates later this month and again in March.

The Bureau for Economic Research (BER) said that it was encouraging that Israel and Hamas have agreed on a ceasefire deal for Gaza.

Although Israel warned that some details still need to be agreed upon, it should come into effect on Sunday, seeing a structured phase-out of hostilities.

The BER said that the promise of less unrest in the Middle East would often contribute to a decline in oil prices, but the imposition of harsher sanctions on the Russian oil industry pushed the price of oil up instead.

On the back of intensified fighting between Russia and Ukraine, the US imposed the most aggressive sanctions on Russia’s oil industry yet, increasing the Brent crude price to over $81 per barrel.

European countries are also set to impose their sixteenth package of sanctions on Russia.

Looking elsewhere, Donald Trump’s economics team said that the tariffs would be less extreme than initially promised under Trump’s campaign.

According to Bloomberg, Trump’s team is looking at a way to roll out higher tariffs with maximum impact, which should boost negotiating leverage, but minimal damage, avoiding a spike in inflation. One possible way is through a stepped approach.

Although this, as well as the lower-than-expected US core inflation print, strengthened the rand against the dollar to about R18.80/$, the average exchange rate for January is still 60 cents weaker against the dollar compared to December.

The BER said that, if sustained, the combination of a weaker rand and a higher oil price does not bode well for South Africa’s inflation and interest rate trajectory.

The fuel price looks set to increase for the fourth straight month in February, with recent projections showing that fuel prices could rise from 75 cents to 90 cents per litre.

“Indeed, as financial markets have started to price fewer rate cuts by the US Fed, traders have now adjusted their expectations to just one 25bps cut by the SA Reserve Bank (SARB) this year, from three expected earlier,” said the BER.

The first SARB meeting is on 30 January.

Although there is an argument to be made that the SARB could pause in January to see how the market dynamics play out in the coming weeks and cut in March, the BER believes that there is a window for the bank to move the policy rate closer to neutral in January.

For now, the BER also believes that the central bank could cut interest rates again in March.

“Inflation expectations have moved in the right direction, down, and even with the upside from the rand and oil price, the forecast is for inflation to remain around the current 4.5%-target,” said the BER.

“There is, however, an increased risk that the SARB (over)cautiously keeps the rate on hold in January and/or March.”


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