Close call for interest rates in South Africa this week

The rand is enjoying a strong run against the dollar, but economists are not sure what to call for the Reserve Bank’s interest rate decision this week.

The South African rand continued to trade below R18.00 to the dollar on Monday (26 May) at R17.87/$, supported by a renewed weakness in the greenback.

The dollar has weakened sharply from recent heights as US President Donald Trump once again ruffled feathers with his ongoing tariff war.

According to Investec chief economist Annabel Bishop, this appears to be an orchestrated effort from the United States; however, with Trump said to be favouring a weaker dollar.

“The US is reported to be seeking to weaken the US dollar for trade support, which has seen the Yen strengthen against the US dollar, and other currencies have tended to gain as well, with the rand appreciating alongside the US dollar,” she said.

From mid-January, when the US dollar index was at 110.0, to the current reading of 98.9, the rand has strengthened against the US dollar from R19.23 over the same period, to R17.8—although this strength tends to be against the US dollar alone.

Bishop noted that the rand has weakened against the euro over the same period in contrast, from R19.51 to R20.37, and against the UK pound from R23.23 to R24.26.

This means that the rand itself isn’t strengthening; rather, it is the dollar that is weaker.

Bishop said that weak sentiment readings for the US economy generally point to future, not current activity, although there has been some evidence of weak patches in the hard data, too.

Overall, though markets are less risk-averse than early in the year, she said.

The US economy is expected to see slower growth this year, but a recession is not widely anticipated, and probability is still at only 40% from the end of April to date, with markets, and the rand, still at risk of volatility.

Locally, inflation remains outside the Reserve Bank’s target range and economic growth prospects have dwindled to sub-1.5%.

Uncertainty over interest rates this week

Talk of inflation sitting out of the SARB’s target range is notable because there are strong indications that this will soon change.

This will have an impact on the rand as well as the trajectory for interest rate cuts.

Specifically, if the target is lowered, the prospect of further rate cuts could fly out the window. This would boost the rand, but spell bad news for debt holders.

However, no mention of changing the target was made during the Budget Speech, and more information is expected to follow the Monetary Policy Committee (MPC) meeting later this week.

There is reportedly broad consensus that the target rate needs to be lowered, and there are indications that technical teams are at the point of making recommendations to leadership of the SARB and National Treasury.

However, Bishop warned that it’s a double-edged sword.

An announcement of a new, lower inflation target risks scuppering interest rate cuts this year. This would keep the differential against US rates wider, supporting a stronger rand.

But this also creates uncertainty for markets.

As it stands, there is a divided outlook for the rates decision this week, with forward rate agreements pointing to a cut of 25 basis points, echoed by Bloomberg consensus.

However, many local economists also see a hold on rates being just as likely, given the lingering uncertainty in global markets.

Bishop said the SARB could choose to cut rates now to avoid any limitations in the future with a lower inflation target. However, this could open it up to risks of having to hike rates later as well.

The decision to hold rates in March was not unanimous, and another split vote is expected this week.

“Lengthy signalling of a lowering of the inflation target, but no announcement, has led to expectations of an interest rate cut,” she said.

“Inflation is low and expected at 4.5% y/y in the medium-term—(but this would be) above the midpoint if the target is lowered.”

The Reserve Bank’s MPC is expected to announce its next rate move on Thursday (29 May).