Reserve Bank in a tight spot
South Africa’s real, inflation-adjusted interest rates reached the highest level in 19 years after price pressures cooled, but that’s unlikely to embolden the central bank to cut borrowing costs by more than a quarter point.
Data Wednesday showed the annual inflation rate slowed to 4.4% in August from 4.6% the prior month, widening the gap to the central bank’s policy benchmark to 385 basis points, or the most since July 2005.
Analysts — who expect the South African Reserve Bank to deliver the first-rate reduction since 2020 when officials announce their decision after 3 p.m. Thursday — don’t see it going big. It has held its benchmark at 8.25% since May 2023.
While the real rate “is relatively high, the difference between its real policy rate and that of the US is historically low, constraining the SARB’s actions significantly,” Albert Botha, head of fixed income at Ashburton Investments, said in a client note.
Some investors are betting the Federal Reserve could announce a 50 basis-point cut at its meeting later on Wednesday.
Narrowing the rate differential between the rand and the dollar could hurt the South African currency, with important implications for inflation. Nor is a larger move in the US seen translating into matching action here.
“Whilst there is no doubt that there is room and certainly a need for local interest rate relief, we do not expect the SARB to be influenced into larger local cuts by larger US interest rate cuts,” said Lourens Pretorius, fixed income portfolio manager at Matrix Fund Managers.
The rand has appreciated about 4% against the dollar since the African National Congress formed a broad coalition in June that’s committed to faster economic reforms after it lost its outright majority in the May 29 elections.
Of the 22 economists in a Bloomberg survey, 21 foresee the reserve bank’s monetary policy committee, which usually moves in increments of 25 basis points, lowering by that margin. One economist predicted a 50-basis point reduction.
Forward rate agreements, used to speculate on borrowing costs, are pricing in 30 basis points of easing.
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