South African Reserve Bank’s golden opportunity

The South African Reserve Bank (SARB) has a golden opportunity to cut rates at its next meeting, as a confluence of global and local factors makes room for rate cuts in the country.

Rating firm S&P Global expects the US Federal Reserve to cut interest rates in September this year, which would allow emerging markets—including South Africa—to start cutting their rates.

S&P said it now expects a 25-basis-point Federal Reserve rate cut in September following the US July jobs report, which confirmed that employment demand in the country is cooling.

“Our baseline view remains that a soft-landing is underway in the US, as the economy shifts from above to below-trend growth,” the firm said. 

“We think the recent loosening of the labour market indicates a normalisation, as opposed to a view that the US economy is about to slip into a recession.”

“An expansion of the labour force rather than a fall in employment has spurred the rising unemployment rate up to now.”

It explained that the repricing in the Fed funds rate created more space for emerging market (EM) central banks to ease.

However, a key risk for EMs is that further market turbulence tightens financial conditions and, therefore, takes a toll on economic conditions.

Old Mutual Wealth investment strategist Izak Odendaal explained that the resilience of South African assets and the rand increases the likelihood of interest rate cuts in September. 

“It is notable that South African investments have held up relatively well. Usually, South African assets are ‘high beta’ to global markets, meaning they fall by more in times of stress,” he said. 

Odendaal noted the risk premium on South African government bonds has declined following the creation of the Government of National Unity and, in particular, its commitment to sustainable fiscal policies. 

This has supported local fixed-income assets and the rand, which is basically flat against the dollar so far in 2024. “This is almost unheard of in a time of global market anxiety,” Odendaal said. 

This, together with the Fed’s looming cuts, means the Reserve Bank should be confident in starting to lower the repo rate at its next meeting. 

The SARB has been in a hiking cycle since November 2021, raising the country’s interest rates by 475 basis points. This has brought the repo rate to a 15-year high of 8.25% and the prime lending rate to 11.25%.

This was done to bring the country’s high and sticky inflation under control, which has largely been successful despite the central bank having kept rates unchanged since May 2023.

The latest inflation print for June came in at 5.1%, marking the thirteenth month CPI has been within the Reserve Bank’s target range of 3% to 6%.

This has led many experts to believe a rate cut is on its way for South Africa.

Standard Bank chief economist Goolam Ballim and Stanlib chief economist Kevin Lings said the central bank is expected to start cutting rates at its September meeting.

They are factoring in a 25 basis point cut but warned that the cutting cycle will likely be shallow and won’t bring much relief to South Africans.

Nedbank has also joined the chorus of industry experts in forecasting 50 basis points of rate cuts for South Africa in 2024. 

In its latest interim results, Nedbank said it remains cautiously optimistic about the potential benefits of South Africa’s GNU and expects better macroeconomic conditions in the second half of 2024 and into the medium-to-long term. 

The bank forecast South Africa’s gross domestic product to increase by 0.9% in 2024, inflation to continue to decline and the prime lending rate to decline by a cumulative 50 basis points in 2024 to end the year at 11.25%. 

However, the bank also warned that the cutting cycle will likely be shallower than many may hope.