FNB shares good news about interest rate cuts 

FNB expects the Reserve Bank to cut interest rates twice more in 2025 to take them to a neutral level as the global macroeconomic environment stabilises. 

However, the bank expects these cuts to be spread throughout the year, with the Reserve Bank opting for a slow and shallow rate-cutting cycle. 

FNB’s comments come after the Reserve Bank’s Monetary Policy Committee (MPC) decided to keep interest rates unchanged at their March meeting. 

This ended a cutting cycle that has delivered a cumulative 75-basis point reduction to date, reducing the repo rate from 8.25% to 7.50%. 

The Reserve Bank’s MPC, with a four-to-two vote split, continued to take a cautious approach as global headwinds unfolded.

FNB said a global environment marred with uncertainty will likely keep monetary policy cautious, and words such as “not in a hurry” will become thematic. 

Rising global debt, compounded by increased defence and infrastructure investment spending in advanced economies, will likely exert upward pressure on the cost of borrowing, diverging from the trends of the 2010s. 

For emerging markets, the initial concern should be around access to global capital markets to support ongoing investments into structural reform and productivity. 

A failure to improve productivity will impede the ability to attract new trade relations as supply chains are re-negotiated. 

In such an environment, delays in reining in fruitless expenditure while running deficits on external accounts will raise risk premia and neutral interest rates.

FNB believes that the MPC will deliver a slow and shallow cutting cycle. Therefore, the March decision is simply a pause in the cycle and a possible resumption with a 25 basis points cut in May. 

The bank sees a further 25bp cut in November, and at that stage, monetary policy will start having a neutral impact on the outlook for economic activity. 

That said, should the outlined sentiment and inflation risks materialise, there is no doubt that the MPC will delay further cuts or hike interest rates to support a stable macroeconomic environment, FNB warned. 

United States Federal Reserve monitoring

The Reserve Bank appears to be closely monitoring the moves of the United States Federal Reserve, which also kept rates unchanged in March. 

It cited elevated inflation risk as the new US administration’s tariff policies stand to raise import costs. 

Although US-led tariffs have not been as broad-based as initially feared, they have been met with retaliation, which could broaden the reach of the trade war over time. 

Unfortunately, not only do tariffs weigh on the economic outlook, but so does policy uncertainty. These developments have stoked recession risk in the US and sustained financial market volatility. 

While the prognosis of growth has worsened, the Fed appears to be more concerned about the risk of inflation.

FNB explained that the Reserve Bank closely monitors the actions of the US Fed because of its outsized impact on financial markets. 

With the US Fed keeping rates where they are, if the Reserve Bank cuts local interest rates, the rand could weaken significantly and reignite inflation. 

An interest rate cut while the Fed holds may have the unintended consequence of weakening the rand versus the dollar as the interest rate differential between the two countries will narrow. 

A narrower interest rate differential will make US-based assets much more attractive to investors on a risk-adjusted basis. 

As a result, capital is expected to flow into the US and out of emerging markets, strengthening the dollar and weakening emerging market currencies, such as the rand. 

In turn, this will make it more expensive for South Africa to import goods, raising prices and inflation.

Another lingering concern for the Reserve Bank is that local inflation is likely to have bottomed, with its next move most likely to be upwards.