Rand helped by interest rates

The Monetary Policy Committee’s (MPC) latest decision to keep interest rates unchanged did not deliver relief for households, but it provided stability for the rand.

Investec chief economist Annabel Bishop explained that the rand has seen particular volatility against the US dollar this year.

The local currency was at R19.23/USD in mid-January, but it strengthened noticeably against the US dollar to R18.00 last week and R18.14/USD on Monday, 24 March 2025.

Bishop said the rand’s weakness was partly due to market expectations for US interest rate cuts that had been largely factored out for this year.

However, more recently, markets factored them back in, with two cuts seen as definite for the remainder of this year and the chance of a third.

She explained that US interest rate cuts positively affect emerging market currencies like the rand, making the bond yields on those countries’ bonds more attractive compared to the US.

Aside from US interest rate expectations, Bishop said the rand also gained due to the repo rate being left unchanged in South Africa following the MPC’s latest decision.

The MPC held its March meeting last week and announced on Thursday, 20 March 2025, that the committee voted to keep rates unchanged.

Reserve Bank Governor Lesetja Kganyago explained in the MPC Statement that, while inflation is still in the bottom half of its target range – the February print came in at 3.2% – it has edged higher over the past few months. 

“Inflation expectations are close to the midpoint. For now, inflation appears contained,” he said.

However, he said the forecast is more uncertain, as there are more moving parts than usual after Stats SA’s reweighting of the Consumer Price Index and the proposed VAT increases announced in the 2025 Budget. 

“The overall result of these changes is a marginally lower inflation outlook, with headline now projected at 3.6% this year and 4.5% next year,” he said. 

“This is mainly due to the better fuel-price projections. It also reflects a more benign path for administered prices, given the lower electricity tariffs announced by NERSA in February.” 

“These factors offset pressure from the proposed VAT increases, which we think will add about 0.2 percentage points to headline inflation.”

Balanced risk

The Governor said the MPC sees risks to this forecast on both the upside and the downside, with the balance of risks in the medium term skewed to the upside.

Against this backdrop, the MPC decided to keep the policy rate unchanged, meaning the repo rate remained at 7.50%. 

“For several quarters, we have enjoyed rising confidence in South Africa, with a smaller country risk premium and lower bond yields,” Kganyago said. 

“However, the global economy is not on a stable footing, and domestic uncertainties are also putting these favourable trends at risk. This calls for a cautious policy approach.”

Bishop explained that, with the MPC unlikely to cut South Africa’s interest rates in the first half of this year, the rand has gained some stability.

The currency was further boosted by the recent MPC communications around its inflation and interest rate outlook.

With the repo rate currently at 7.50%, the SARB’s forecast sees rates stabilising at a neutral level of about 7.25%, implying only one more cut in the current cycle.

The MPC’s cut is still forecast for 2025, but no specific timing was given. Thus, based on the MPC’s projections, the repo rate will remain at 7.25% until the end of 2027. 

Interest rates in South Africa support the rand

Bishop said that flat to higher interest rates in South Africa tend to support the rand. 

This is because when interest rates remain flat or increase, South African bonds and deposits offer relatively higher returns compared to other countries. 

This attracts foreign investors looking for better yields, leading to foreign capital inflows and increasing demand for the rand.

In addition, when the Reserve Bank keeps interest rates stable or raises them, it helps control inflation. 

Lower inflation preserves the purchasing power of the rand, making it more attractive to investors.

Bishop said that while the MPC may not necessarily stick to this interest rate forecast, it has dropped its inflation forecast lower.

The Reserve Bank sees CPI inflation closer to 3.5% this year than its previous forecast of closer to 4.0%, while its forecast for next year remains around 4.5%.

The MPC targets inflation on a forward-looking approach, 6 to 24 months out, but mainly in the 12-to-18-month period, with this seen as when the risks to the inflation outlook are to the upside.

The MPC’s forecast report shows that its steady-state repo rate is 7.00%, essentially a neutral rate. 

This is 2.5% above the 4.5% mid-point of the inflation target range, implying a further cut in the repo rate if conditions are balanced.

“Economic growth is weak, and further interest rate cuts this year would be supportive for the economy, while inflation is expected to be contained, although the SARB is generally risk averse and an upside risk to its forecasts would render it cautious,” Bishop said.

“It is unlikely the SARB expects another interest rate cut in H1 2025, and we continue to expect the next move will be in July.”

Bishop expects a 25 basis point cut in July, which could be followed by a further 25 point cut in November.