Interest rate relief may come sooner than expected

Traders brought forward bets for South Africa’s first interest-rate cut in four years to September as the nation’s biggest political rivals edge closer to forming a government favoured by investors after last month’s election failed to produce an outright winner.

The shift followed news that the ANC, which lost its parliamentary majority in the May 29 elections for the first time since White-minority rule ended in 1994, may form an alliance with the centrist Democratic Alliance.

According to people familiar with ongoing talks, it was said to have resolved key obstacles with the DA toward an accord that will allow Cyril Ramaphosa to be re-elected as president by lawmakers on Friday.

Such an outcome would likely see markets react positively on expectations that it would bolster Ramaphosa’s efforts to rein in state debt and tackle power cuts and logistics snarl-ups that have hobbled the economy.

The currency also took heart from milder-than-expected readings on US consumer prices on Wednesday and softer producer prices on Thursday.

Positive sentiment toward the rand could help contain inflation, which was at 5.2% in April.

The South African Reserve Bank’s Governor Lesetja Kganyago has repeatedly said that policymakers will only lower rates held at 8.25% since May 2023 when inflation is firmly at the midpoint of its 3% to 6% target range.

Forward-rate agreements used to speculate on borrowing costs show traders are now pricing in a 15-basis-point rate cut at the monetary policy committee’s September meeting and a full 25 basis-point reduction by the end of the year.

That’s in line with economists’ estimates in a Bloomberg survey conducted before the MPC’s May meeting for a cut in the third quarter.

Before the May 29 elections, traders had only priced in lower rates next year.

The MPC last month reassessed risks to inflation as broadly balanced, from being skewed upwards at its previous meeting.

The review came after inflation cooled for two straight months in April, prompting the central bank’s quarterly projection model to forecast price growth stabilising at the 4.5% midpoint earlier than previously expected.