Should the SARB wait for the Fed?

Helena Wasserman - With the end of a punishing interest rate cycle finally in sight, impatience is growing.

A third of the monetary policy committee members — two out of six — pushed for a rate cut of 25 basis points on Thursday.

SA Reserve Bank (SARB) governor Lesetja Kganyago said there was a protracted debate before the committee arrived at a common position to keep rates unchanged at a 15-year high.

The decision was based on the risks to inflation, with the committee needing "a couple of prints of inflation" to be comfortable enough that inflation risks have subsided.

Inflation

Kganyago is concerned about global food prices – like wheat and other cereals – which are priced in US dollar. A weakening in the rand will push local prices higher.

He warned that rates in the US may stay higher for even longer than markets currently anticipate, which will keep the dollar strong and bring risks to the rand.

Global inflation also remains hotter than expected, in part due to a rise in shipping prices, Kganyago pointed out.

Attacks by Houthi rebels on cargo ships in the Red Sea are forcing ships to avoid the Suez Canal and take a much longer, more expensive route around the South African coast instead.

In addition, drought conditions and low water levels in the Panama Canal have also disrupted shipping.

A further risk is service inflation in South Africa, with Kganyago highlighting that rental prices are starting to pick up.

Cooling down

But while the MPC assesses the risks to the inflation outlook to be to the upside, the economic unit of the Nedbank Group points out that the Reserve Bank's quarterly inflation forecasts have improved significantly.

The bank now expects inflation will reach its target of 4.5% in the fourth quarter of 2024 – two quarters earlier than anticipated at the last meeting in May.

Given its own forecasts of cooling inflation in SA, there appears to be hesitancy to cut rates before the US.

Old Mutual group chief economist Johann Els says the MPC apparently has a misplaced fixation with US rates, and that local rates should have been cut last week.

Rand

The fear is that if SA rates were lowered out of tandem with the US, the rand would take a hit as investors move their money to where they can earn higher interest.

Els says this is unfounded in the current environment.

The rand has been strengthening and has a brighter outlook given that the political uncertainty of the elections was resolved with a market-friendly government. According to Els: “Cutting a couple of weeks before the Fed won't make a difference.”

In fact, lower interest rates will boost a struggling economy, which will have a positive impact and support the local currency, says Els.

With the MPC now acknowledging that inflation is cooling down more than expected, while also acknowledging that the economy is not growing as fast as it previously expected, what is it waiting for, asks Els.

"Do we really have to force consumers into recession before we lower interest rates?"

Burning question

Vivienne Taberer, investment director at Ninety One, says the burning question now occupying the market is whether the MPC – "under the hawkish leadership of Kganyago" — will move ahead of the Fed.

While Els says there is a chance that the Fed could lower rates as soon as its next meeting at the end of this month, the market consensus is that US rates will be cut in September.

The MPC will announce its rate decision on 19 September, but the decision will have been made the day before.

This will potentially be only hours before the Fed’s press conference on the evening of 18 September, says Taberer.

"Given the more conducive South African domestic backdrop, our view is that any further softening of US data and Fed rhetoric ahead of its own September meeting will be enough to tip the balance towards a SARB cut."

Cautious

But FNB chief economist Mamello Matikinca-Ngwenya says the MPC should remain cautious.

"While political uncertainty has subsided and the energy constraint has alleviated, unified policy implementation remains key to driving productivity growth. In addition, surveyed inflation expectations remain above the SARB’s 4.5% target, and the global high-for-long interest rates theme prevails."

Kganyago pointed out that South Africa's inflation rate of 5.2% is the second-highest in the G20, "so our policy stance still has some way to go in terms of reining in inflation".

Trend

He also noted that countries such as Brazil, which had already cut their interest rates, have seen inflation increase in recent months.

The same happened in Europe, where the European Central Bank recently lowered rates.

Matikinca-Ngwenya anticipates a shallow cutting cycle, with the markets currently pricing in cuts of around 100 basis points over the next 15 months.

But Taberer says this is likely too conservative, if history is anything to go by.

"Our analysis of over 70 global interest rate cycles over the past 20-plus years has taught us two things: Firstly, markets generally underestimate hiking cycles, and secondly, they underestimate the speed and magnitude of the cutting cycle. We do not expect the South African cutting cycle to buck this trend." - Fin24