The South African Reserve Bank’s (SARB) outlook for the remainder of 2024 suggests that macroeconomic conditions will likely favour the initiation of interest rate reductions in the latter part of the year. However, a lot hinges on the feasibility of a multi-party coalition following the ANC’s loss of an absolute majority in the national election, as well as how markets respond once the specifics of a government of national unity
are disclosed.

David Fowkes, a member of the Monetary Policy Committee (MPC) and adviser to the Reserve Bank governors, suggested that if the market’s response to the new government is positive, bolstering the rand along with other supportive economic conditions, the SARB could implement rate cuts of approximately 100 basis points (bps) during the second half of 2024 and into 2025. However, he noted that due to persistent high global interest rates and a strong US dollar, the anticipated timing for the SARB to commence its rate-cutting cycle has been delayed.

According to BusinessDay, “at the start of the year there was optimism in global financial markets that central banks would announce several interest rate cuts in 2024. However, these expectations dwindled as the year progressed, largely due to elevated inflation rates persisting above targets, particularly in
the US.

Central banks across the globe have either paused or deferred their rate cutting cycles due to inflation rates being higher than usual and remaining above their targets. “There’s considerable worry that inflation will continue to stay above target,” Fowkes added.

The European Central Bank (ECB) and the Bank of Canada have recently implemented interest rate cuts, with the ECB reducing three key rates by 25 basis points (bps). However, this does not imply an immediate start to the Federal Reserve’s (Fed) cutting cycle; market forecasts are indicating September
as a potential timeframe.The MCP maintained SA’s policy rate at its record-high of 8.25%, where it has been since May 2023.

However, it went to report that there has been noticeable improvement in the inflation outlook since its March forecast, with expectations that it will reach its midpoint objective of 4.50% earlier – in the second quarter of 2025. Previous forecasts had projected the end of 2025. Addressing a media briefing last week, SARB Governor Lesetja Kganyago said: “In assessing this forecast, the MPC noted a range of risks. Inflation expectations have moderated in the latest survey. This is welcome, but two year ahead expectations are still in the top half of our target range.” “We’re not going to get carried away with this projection. But our
best estimate at the moment is that we’re only a few quarters away to getting inflation back to target” said Fowkes. 

Most policy rate cuts expected in the second half of 2024

Bottom line:

Thus far, the rand has been strengthening on the back of
political news. This creates valuable space for the MPC to
consider rate cuts more seriously, without the fear that they
may weaken an already soft rand.

Macroeconomics in Brief

Macro Economics 19 April 2024