Elections will keep interest rates higher for longer

South Africa’s general elections in 2024 will push the Reserve Bank to keep interest rates higher for longer to prevent excessive rand volatility and ensure price stability. 

This is feedback from fixed income portfolio manager at Sanlam James Turp, who told CNBC Africa that interest rate cuts are coming in 2024 but not as soon as some think. 

With next year being an election year, investors will expect volatility in the price of South African assets and the local currency. 

In particular, foreign investors will be hesitant to invest without certainty as to who will run the country and their economic policies. 

This uncertainty will compound the impact of existing structural economic constraints, such as load-shedding and the logistics backlog, on South African assets. 

“With the election, I think that stops you from cutting rates too soon. You do not want to give the rand any more volatility by perhaps being ahead of the curve,” Turp said. 

Therefore, the Reserve Bank will cut interest rates in 2024 but will likely defer cuts until after the elections. 

“The longer interest rates are, the better for inflation,” Turp said. This is an additional benefit to ensuring the rand remains stable. 

“Globally, it looks like we have seen the peak of interest rates. The Federal Reserve is starting to talk about easing, and the market is pricing in quite aggressive cuts in the US.”

Turp’s comments echo those of Reserve Bank Deputy Governor Fundi Tshazibana. 

“There still seems to be a good case for keeping rates higher for longer domestically,” Tshazibana said at a Bank of America conference last week. 

This is because the government needs to raise borrowing while interest rates are higher and South Africa’s risk premium has risen. 

The National Treasury raised its borrowing to around R14 billion a week from August. 

“The underlying drivers of interest rates are going up. To maintain the value of the currency – that is, to stabilise inflation – actual rates must rise too,” she said.

Tshazibana also emphasised that the Reserve Bank is aware of the impact of raising interest rates and keeping them higher for longer on South Africans.

For interest rates to come down, she said there needed to be reforms to reduce the country’s risk premium and potentially a lower inflation target. 

“Higher for longer is not inevitable. We have to control inflation, but if we have different macro arrangements, that could be done more cheaply.”