Bank of America expects the Reserve Bank to cut interest rates from July 2024 onwards, cutting a cumulative 75 basis points in 2024 and a further 50 basis points in 2025. This will bring the repo rate to 7% at the end of 2025.
In the bank’s ‘Emerging EMEA: South Africa – election, cuts and budget’ report, senior economist Tatonga Rusike said it is unlikely the Reserve Bank will cut rates as quickly and deeply as the market expects in 2024 and 2025.
While the market anticipates a much steeper cutting cycle, with nearly 100 basis points cut in 2024 beginning in May, there are “domestic setbacks that could constrain earlier and more substantial cuts”.
These include uncertainties regarding the severity of load-shedding in 2024, Transnet’s deteriorating performance, and policy uncertainty surrounding the national elections.
“The bad news is that the cutting cycle is likely to be shallow – a cumulative 125 basis points over two years to 2025 compared with 475 basis points of hikes from November 2021 to May 2023,” Rusike said.
Bank of America expects the Reserve Bank to begin cutting rates in July, with a cumulative 75 basis points cut in 2024 and a further 50 basis points in 2025. This will take the repo rate down to 7%.
Bank of America has slightly changed their expectations for rate cuts from its previous baseline due to expectations that the Federal Reserve in America will cut rates sooner.
“The Fed is likely to cut about 100 basis points in 2024 starting in March. In our view, this earlier move would give the Reserve Bank room to cut 75 basis points in 2024, compared with our previous baseline of 50 basis points.”
Rusike cautioned that this outlook depends on domestic inflation continuing to moderate on lower global oil prices and central banks cutting rates in developed markets.
South Africa’s national elections in 2024 also pose a challenge to the Reserve Bank, with the increased uncertainty likely to ensure it keeps rates higher for longer.
Fixed income portfolio manager at Sanlam James Turp said interest rate cuts are definitely coming in 2024 but not as soon as many think due to the elections.
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 about 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 high, the better for inflation,” Turp said. This is an additional benefit to ensuring the rand remains stable.