Interest rate cuts on the cards for South Africa

The Reserve Bank’s room to cut interest rates at its next meeting in May and July is growing, with the rand bouncing back and oil prices down 20% year-on-year. 

This has been coupled with greater global certainty, with the United States beginning to conclude trading deals with some of its largest partners and walking back some of its harsher tariffs. 

As a result, the Reserve Bank’s Monetary Policy Committee (MPC) can focus more on local inflation readings to guide its decision. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who outlined the changing landscape in which the MPC will make its next few decisions regarding local interest rates. 

Odendaal explained that the MPC has been relatively cautious in cutting interest rates so far, with concerns about rand fragility and global volatility preventing a faster and deeper cutting cycle. 

If the MPC had cut rates more sharply, the rand might have weakened as capital flowed out of South Africa to assets with better risk-adjusted returns. 

This would have the potential to reignite inflation by making it more expensive to import goods into South Africa, particularly oil. 

On the other hand, the Reserve Bank has been deeply concerned about the impact of volatility in financial markets on the rand and local assets. 

This has resulted in it being hesitant to cut rates as it would make local assets increasingly vulnerable to heightened global risk aversion. 

Given heightened global trade policy and geopolitical uncertainty, this can result in pronounced currency weakness and higher imported inflation.

Odendaal also said that the MPC would have been influenced by the Federal Reserve adopting a wait-and-see approach to its own interest rates. 

The US Fed has kept interest rates unchanged at its last three meetings, including the most recent one on 7 May. 

Fed officials will feel vindicated that this has been the right action, as they did not know what would happen to tariffs and what impact they would have. And they still don’t know. 

Though it does appear that Trump will not steer the car over the cliff, he might still drive very close to the edge in the months ahead.

Good news for local interest rates

While the increased uncertainty will impact business activity and employment, Odendaal said the US economy was likely to slow this year anyway.

This means that the Fed is still likely to cut rates later this year, though the market now only discounts two rate cuts this year, down from four a few weeks ago.  

Furthermore, the inflationary impact of tariffs may be undone to some extent by the oil price, which has declined by about $10 per barrel since the start of the year and 20% over 12 months. 

For central banks outside the US, the situation is easier as the trade war is a demand shock that risks sending growth and prices lower, and interest rate cuts are a tried-and-tested response. 

Since the 2nd of April, 15 central banks have cut interest rates, including the Bank of England, the European Central Bank, the Bank of Mexico and the People’s Bank of China.

The South African Reserve Bank is now more likely to join that list, Odendaal said, as some of its major concerns have eased noticeably since its MPC last met two months ago. 

The rand-dollar exchange rate has stabilised after the steep declines in the wake of the 2 April tariff shock, bouncing back from a low of R19.89 on the 8th of April as global markets were gripped by panic. 

As global investors started relaxing, the rand regained lost ground, repeating a pattern we’ve seen many times before. 

If global market conditions stabilise, the Reserve Bank can put more emphasis on domestic inflation dynamics, which points to interest rate cuts. 

Consumer inflation fell below its 3% to 6% target range in March, meaning that the real repo rate is now sitting at 4%. 

The rand oil price is 20% lower than a year ago and will detract from inflation readings for the next few months until base effects kick in later this year. 

There is an MPC meeting on the 29th of this month, and then again in late July, September and November. 

May’s meeting is a close call, but by the July meeting, the MPC will know what happens after the 90-day tariff pause passes. 

Further interest rate relief will support the nascent recovery in consumer spending. However, the extent of rate cuts could be limited by a shift to a lower inflation target. 

The Deputy Finance Minister suggested at an investors’ conference last week that an announcement on discussions between the Reserve Bank and Treasury on the matter will be made soon.