SARB keeps hawkish eye on US Fed to determine road ahead
AS DEBT-LADEN consumers will be breathing a sigh of relief for the next two months after the South African Reserve Bank (SARB) took the foot off the pedal on interest rates, the next monetary policy frontier will be determined by the US Federal Reserve this coming week.
Investors are now assessing more US data to guide the outlook for Fed monetary policy after weekly jobless claims in the US fell to a two-month low last week, cementing expectations that the Fed would hike rates by 25 basis points this coming week.
Last month, the Fed held its benchmark overnight interest rate at 5.25% per annum on the back of cooling global inflation as a result of market participants normalising tense economic conditions.
On Thursday, the SARB also kept its benchmark lending rate unchanged at a 14-year high of 8.25%, leaving the prime lending rate at 11.75%, after inflation dipped below the upper limit of the target range in June.
It ended a sequence of 10 consecutive hikes since November 2021.
This was on the back of the annual headline inflation rate easing further to a 19-month low of 5.4% last month, down from 6.3% in May and below market forecasts of 5.6%.
The SARB revised down its headline
inflation for 2023 to 6%, from 6.2% previously, while the forecast for 2024 also decreased to 5%, before stabilising at 4.5% in 2025.
Notwithstanding the lower inflation forecast, the central bank still noted risks to the inflation outlook such as elevated global food prices, tight global oil markets, the coming El Niño season, high administered costs, the energy crisis, logistic constraints and higher average salaries.
SARB Governor Lesetja Kganyago said globally, monetary policy was likely to remain focused on ensuring inflation continues to retreat,
implying policy rates will stay higher. Kganyago said they expected markets in major financial centres to remain volatile.
“Sticky inflation in major economies suggests that average interest rates in these economies will remain high,” Kganyago said. “As a result, tighter global financial conditions are likely to persist, raising the risk profile of economies needing foreign capital.”
Kganyago emphasised that the country was not out of the woods yet, adding that decisions on rates will continue to be data-dependent and sensitive to the balance of risks to the outlook. Several analysts have noted that another rate increase might have been on the cards, especially following the latest employment stats from the US earlier this month, which sent shock waves through local stock markets.
The rand has generally weakened over the past year, depreciating by about 5% year to date against the US dollar, and showing high volatility in response to risk-on and risk-off episodes.
Nedbank chief economist Nicky Weimar said the rand was still a risk to the SARB raising rates as it remained vulnerable to any change. Weimar said the SARB had to remain hawkish and conservative as there was uncertainty over the US monetary policy even though the markets were already starting to price in the prospect of an interest rate cut in the US.
“So the dollar is weakening in response to that and the rand’s recent pullback, it’s got everything to do with dollar weakness. Investors are seeing peak US interest rates very close. There is still uncertainty that the US will raise rates,” Weimar said.
“So the bottom line is, from the Reserve Bank’s perspective, that inflation is now moving in the right direction. But from their perspective, they might be pushed through one rate hike of 25 basis points to give themselves a bit of a buffer if the US Federal Reserve raises rates.”
Activtrades senior analyst Ricardo Evangelista said investors were already focused on next week’s Fed meeting and rate decision.
Evangelista said despite the slowdown in US inflation and disappointing employment figures, a rate hike of 25 basis points remained priced into the value of the greenback.
“What investors really want to know is what the Fed will do after. Will July’s hike be the last in this cycle, or could there be more later in the year,” he said.
“Currency traders will pay close attention to the message delivered by Jerome Powell, eager for guidance on the central bank’s intentions. Until then, the dollar is likely to remain relatively stable in relation to other major currencies.”
RE/MAX of Southern Africa CEO Adrian Goslett said when the US employment rates increase, their inflation rates can usually be expected to increase, which in turn will lead to interest rate hikes.
“If the US raises their rates, South Africa usually will too, otherwise our rates become less attractive and investors become more likely to withdraw their funds from the country, which would only put further pressure on our economy,” Goslett said. “While the US has started to get their inflation under control, it is still uncertain whether enough has been done to convince the Fed to ease interest rates.”