Prepare for rand rollercoaster ride

Interest rate cuts in South Africa will likely weaken the rand initially, but positive effects following rate cuts could be a significant boost for the currency.

This is according to FutureForex CEO Harry Scherzer, who said the South African Reserve Bank (SARB) is set to cut interest rates for the first time since the Covid-19 pandemic.

The SARB’s Monetary Policy Committee (MPC) will meet again in September, where many experts believe it will vote to cut rates in South Africa for the first time in years.

South Africa has been in a hiking cycle since November 2021, when the MPC started raising interest rates in an effort to tame the country’s high, sticky inflation.

The committee has raised interest rates by a cumulative 475 basis points in this cycle, bringing the repo rate to a 15-year high of 8.25% and the prime lending rate to 11.75%.

Their efforts have been largely successful. The latest inflation print shows CPI at 4.6%, close to the midpoint of the SARB’s 3% to 6% inflation target range.

While high interest rates have helped to bring inflation down, it has also placed South African households under significant pressure and added to the already high cost of living.

However, the SARB has repeatedly said it would not consider cutting rates until inflation has sustainably come down and is anchored around the midpoint of the target range.

Considering that inflation has been on a downward trend since February this year, many experts believe the MPC will vote to cut rates at its next meeting on 18 September.

Scherzer said this decrease will come as welcome news to heavily indebted consumers.

However, he said that as welcome as the rate cut will be to anyone paying off a home, car, or student loan and to those with credit card or store debt, it has other implications, too. 

“At least some of these implications will impact individuals and businesses moving large sums of money internationally,” he said.

“With the right strategies in place, however, they can take full advantage of any positive impacts of an interest rate cut while also mitigating any negative effects.” 

“One of the most important actions any person or business can take on this front is to ensure that they use the right international money transfer provider.”

However, Scherzer said that before considering why choosing the right provider is so important, it’s worth understanding how interest rates can impact currency exchange rates. 

For example, he said an interest rate cut could weaken the rand as investor money flows out of government bonds. 

“That’s not specific to the rand either. The US dollar has already weakened off the back of speculation around an interest rate cut,” he said. 

“While that’s benefitted South African consumers, particularly at the petrol pumps, it will be interesting to see what impact rate cuts from both countries have on the exchange rate between their two currencies.”

While interest rate cuts will have an initial negative impact on the rand, as interest rates fall in South Africa and around the world, the economy could also be positively affected. 

For example, if central banks have managed to stabilise inflation while avoiding a global recession – which seems likely – then they may well be more inclined to keep cutting them. 

“If that’s the case, investors will likely turn away from the relative safety of government bonds and towards riskier asset classes in the quest for higher yield,” he said.

“That, in turn, could result in those investors backing South African technology startups, infrastructure projects, and other asset classes, boosting the economy.” 

“The economy could also benefit from increased consumer spending as servicing debt becomes more affordable. If significant economic growth is the result, then the rand could strengthen further.”

Rand rally

At the end of August this year, the rand climbed to a 13-month high, riding a wave of optimism about South Africa’s economy and also buoyed by expectations of imminent Federal Reserve interest rate cuts.

Bloomberg reported that investors are looking more favourably at South African assets following the May general elections, which saw the ANC enter into a coalition with the DA and smaller opposition parties.

This election outcome raised expectations of much-needed reforms to stimulate the economy. 

Razia Khan, chief economist for Africa and the Middle East at Standard Chartered, told Bloomberg that with load-shedding also easing, the outlook for the economy is bright.

Expectations of Fed policy easing starting next month are also prompting investors to look for higher-yielding assets such as South African rand bonds.

This optimism has seen net inflows of R16.4 billion into the country’s debt market in the past five days.

“The end to load-shedding has improved South Africa’s growth outlook, while disinflation is now in place – the cumulative impact of earlier tightening,” Khan said. 

“When we add to this the favourable impact of Fed easing expectations, everything falls into place for a sustained rand rally.”

In addition, the end to regular power outages may lead to an upward revision to economic growth forecasts and help in the fight against inflation.

The SARB currently expects the economy to grow 1.1% in 2024 and 1.5% next year.