Elections may delay interest rate cuts

South Africa’s national elections may delay interest rate cuts, as the Reserve Bank would be unwilling to introduce additional volatility to the country’s currency during heightened political uncertainty. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who said the first interest rate cuts are likely to occur only after the elections at the end of May.

Odendaal explained that the elections make the Reserve Bank’s job more complicated. They come at a time when inflation has been trending downwards, which would typically lead to rate cuts.

“As long as global oil and food prices remain well behaved and the rand doesn’t fall further, the worst of the inflation increase is behind us, and it should drift towards the target in the months ahead,” he said. 

Rate cuts should follow, but again, the question is when and, more importantly, by how much.    

The local election is a potential factor in the Reserve Bank’s decision-making, with its scheduled 30 May Monetary Policy Committee (MPC) meeting occurring before the election results are finalised. 

This means there could be excessive market volatility as investors await the outcome after months of political uncertainty. 

Thus, the MPC might decide that it is an inopportune time to change policy, Odendaal explained. 

This period of elevated uncertainty and volatility may last for a lengthy period after the election as coalition negotiations take place, further delaying rate cuts. 

Odendaal’s comments echo those of Sanlam’s fixed-income portfolio manager, James Turp, who said earlier this year that interest rate cuts are coming in 2024 but not as soon as some think. 

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

“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.