The South African Reserve Bank will likely lower interest rates by 25 basis points on Thursday, despite a larger-than-expected overnight move by the Federal Reserve as it turns the screws on inflation.<\/p>\n\n\n\n
Almost all of the 24 economists surveyed by Bloomberg expect Governor Lesetja Kganyago to reduce the rate from a 15-year high to 8% when he announces the decision after 15h00 at a press briefing north of Johannesburg. <\/p>\n\n\n\n
It will be the SARB\u2019s first easing since the pandemic in 2020.<\/p>\n\n\n\n
A 50 basis-point cut by the Fed isn\u2019t going to change that, according to economists at Rand Merchant Bank, who saw the six-member monetary policy committee constrained by the narrow gap between the US and South Africa\u2019s real \u2014 or inflation-adjusted \u2014 rates of interest.<\/p>\n\n\n\n
\u201cWe find this to be improbable,\u201d Keabetswe Mojapelo and Manqoba Madinane said in a note in which they reiterated their view of a quarter-point reduction. <\/p>\n\n\n\n
\u201cThe SARB has highlighted that real rates in South Africa are already low and do not offer the same buffer as in other emerging markets, limiting their capacity for aggressive cuts.\u201d<\/p>\n\n\n\n
South Africa\u2019s real rates have reached the highest level in 19 years after price pressures cooled. Data on Wednesday showed annual inflation slowed to 4.4% in August from 4.6% the prior month, widening the gap to the central bank\u2019s policy benchmark to 385 basis points \u2014 the most since July 2005.<\/p>\n\n\n\n
While the real rate \u201cis relatively high, the difference between its real policy rate and that of the US is historically low, constraining the SARB\u2019s actions significantly,\u201d said Albert Botha, head of fixed income at Ashburton Investments.<\/p>\n\n\n\n
Still, the decision may be close, with economists in a separate survey expecting the MPC to be split on the decision, with most members favoring a quarter-point reduction.<\/p>\n\n\n\n
Price pressures, for the first time in more than three years, have now moved below the midpoint of the central bank\u2019s 3% to 6% target band where it prefers to peg expectations. But policymakers have been disappointed before by the failure of inflation to cool as forecast and are expected to be cautious, at least as they get the easing cycle underway.<\/p>\n\n\n\n
\u201cI don\u2019t think the Reserve Bank will follow 50,\u201d said Old Mutual Group Chief Economist Johann Els. \u201cBut by November the Reserve Bank will very likely cut by 50 as well because by that time the Fed would\u2019ve cut again.\u201d<\/p>\n\n\n\n
His bets hinge on forecasts for the rate of inflation to slow to 3.6% by the time the SARB announces its final policy decision of the year on 21 November.<\/p>\n\n\n\n
\u201cBy the time the Reserve Bank comes to November, it will be very difficult for them to not cut by 50 if our inflation is below 4% and the rand is strong and the Fed has cut more,\u201d Els said.<\/p>\n\n\n\n
Rand sings<\/strong><\/p>\n\n\n\n Meanwhile, the rand gained Thursday morning ahead of the SARB’s interest rate decision.<\/p>\n\n\n\n The currency strengthened 0.1% to 17.5331 per dollar by 07h00 in Johannesburg, hovering around its strongest level since February of last year. By 11h00 it had strengthened even further to around R17.45\/$.<\/p>\n\n\n\n The currency strength comes off the back of the US Federal Reserve\u2019s move to lower its benchmark interest rate by half a percentage point on Wednesday. <\/p>\n\n\n\n Fed Chair Jerome Powell cautioned that the decision to cut by 50 basis points rather than 25 should not be seen as indicative of the future pace of easing.<\/p>\n\n\n\n US rate cuts would normally be expected to give some relief to emerging-market currencies like the rand as some investors in US assets seek higher returns elsewhere. But they can also set off a chain of other cuts around the world, with policymakers following the US to provide stimulus to their own economies.<\/p>\n\n\n\n
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