No interest rate cuts in the next six months – Annabel Bishop

The South Africa’s Reserve Bank’s (SARB) Monetary Policy Committee will likely only cut interest rates in the second half of the year or when inflation dips below 5%.

This is the view of Investec chief economist Annabel Bishop, who said that, although the US Federal Reserve may cut rates sooner, the SARB remains hawkish.

The MPC will announce the next interest rate decision on 26 January, a few days before the Federal Open Market Committee (FOMC) meeting at the end of January.

Bishop said both the MPC and the FOMC are expected to leave interest rates unchanged, with the FOMC minutes released last week proving more cautious on the start of the US rate cut cycle than markets were hoping for. 

The FOMC minutes said, “The importance of maintaining a careful and data-dependent approach to making monetary policy decisions and reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time.”  

This echoes what SARB Governor Lesetja Kganyago has also previously stated.

At the MPC’s November meeting, he said serious upside risks to South Africa’s inflation remain, and MPC decisions will continue to be data-dependent.

Bishop said financial markets tend to run ahead on exuberance, and the rand saw some strength early last week, then mild weakness after the FOMC minutes were released, but largely traded relatively quietly overall.

“The start of the US rate cut cycle is typically positive for investor appetite towards emerging market (EM) portfolio assets, bolstering EM currencies, but investor sentiment towards South Africa has been negatively affected by domestic issues,” she said.

Financial markets have also pulled back on expectations of the timing of the first US interest rate cut.

Early last week, markets anticipated a 75% chance of a 25 basis point cut in March, but they now expect around 50%.

Additionally, the previous 100% chance of close to two 25 basis point interest rate cuts in the US by the 1 May FOMC meeting has now dropped to around 87% chance of one. 

South Africa’s market does not expect a cut in the first quarter of 2024.  Instead, South Africa’s forward rate agreement curve factors in at least two 25-basis point cuts in the second half of 2024. 

Bishop said the SARB tends to be on the hawkish side and will view the CPI inflation rate above 5.0% year-on-year as a disincentive to any interest rate cuts in the near term.

The SARB has communicated its determination to see CPI inflation be anchored around the mid-point – 4.5% – of the inflation target range. 

The latest print came in at 5.5%, and inflation will likely remain above 5.0% until March, only reaching 4.5% in July. 

Additionally, risks to the inflation outcome are to the upside, with CPI inflation likely to rise to around 5.8% in January.  

“We continue to forecast South Africa’s first interest rate cut in H2 2024,” Bishop said.