Bad news about interest rate cuts in South Africa

The South African Reserve Bank is unlikely to cut interest rates soon, with the local money market pricing in no rate cuts this year at all. Inflation remains sticky around the world, preventing central banks from cutting. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who outlined why the US Fed and, in turn, other central banks are unlikely to cut rates in his weekly investment note. 

“In the investment universe, the sun is the US Federal Reserve. Just as the planets revolve around the sun, so do all financial assets worldwide price off the Fed’s policy interest rate,” Odendaal said.  

This is because the US has the world’s largest economy and a financial market that dwarfs all others, while its currency is the global reserve.

Odendaal said inflation declines in the last few months of 2023 were unexpectedly quick, leading to the US market pricing in up to six rate cuts this year. 

However, inflation data from the US in the first three months of this year have come in higher than expected and point to persistent price pressures in service categories.

He explained that the US has become a victim of its own success. Its strong economy results in increased consumer spending, which puts upward pressure on prices, and low unemployment results in higher wages. 

Furthermore, recent increases in oil and other commodity prices are a concern, particularly given the dramatic escalation in the Middle Eastern conflict. 

As a result, the Fed has toned down its rhetoric about potential rate cuts and has said it is unwilling to ease its monetary policy until there is certainty that inflation will hit its 2% target. 

Market forecasts for rate cuts have been tempered, from up to six cuts at the beginning of the year to only two. 

“When it comes to South Africa, there is no question that the Fed looms large in the Reserve Bank’s thinking,” Odendaal said. 

The US inflation numbers interrupted a promising rally in the rand last week. He explained that the weakening of the local currency was not due to election polls showing the ANC losing ground. 

The impact of US inflation on the rand reflects how much the SARB watches the movements of the US Fed.

“As the timing and depth of US interest rate cuts get pushed back, the same is probably also true for local rates.” 

The local money market is no longer pricing in any rate cuts this year, though Odendaal says such a view is probably overdone.