Two SA interest rate cuts may still come this year

Garth Theunissen - The South African Reserve Bank (SARB) will keep its benchmark rate unchanged this week, holding SA borrowing costs at a 15-year high.

But there is scope for as many as two rate cuts before year-end provided the US Federal Reserve cuts earlier than expected, according to Bank of America (BofA) Securities.

Just a month ago, the Fed was expected to cut rates only once in 2024 due to sticky inflation, but bets are increasing that US borrowing costs may drop as soon as September after better-than-expected inflation data was released in the world's biggest economy last week.

BofA says that could see the SARB follow its US counterpart with a rate cut in September and another in November, though the firm cautions that this is not its base case scenario.

"If [the] Fed were to initiate [the] cutting cycle as early as September, we would see two SARB cuts, in September and November," BofA Securities said in a research note on Monday.



Rate announcement

Nevertheless, the US lender was quick to add that the Monetary Policy Committee (MPC) will keep its policy rate unchanged at 8.25% in a unanimous vote when it announces its rate decision tomorrow.

This is despite the central bank getting more comfortable with the trajectory of domestic inflation, which BofA Securities says could fall below 5% by the end of the third quarter.

"Any minority voting for a cut would increase the likelihood of a full rate cut in September," BofA Securities added.



Exchange rate

Apart from the requirement for a Fed rate cut by September, BofA Securities says a rate cut by the SARB that same month will depend on a further decline in inflation expectations and the rand remaining at around R18/$.

With the US Bureau of Labour Statistics saying last week that consumer inflation fell 0.1% in June, sending the annual inflation rate to 3% from 3.3% the previous month, hopes that the Fed may cut rates sooner are growing.

"[The] Fed believes inflation is getting close to its target of 2%. That background increases the likelihood of [the] Fed cutting in September," BofA Securities said.

"Our US economists are emphasising that Fed cuts are not just about inflation anymore as the Fed is also concerned about the economy."



Base case

But while BofA Securities acknowledges the increasing likelihood of US rate cuts in September, its base case is still for the first Fed cut to be in December. As a result, its base case is also for the SARB to only start cutting rates in January next year.

It is then expected to follow that up with further 25 basis point cuts in March, May, and July, making for a cumulate 100 basis points of cuts in the next monetary policy easing cycle.

"We see the cutting cycle as shallow with a terminal rate of 7.25% by mid-2025," BofA Securities said. "We forecast inflation to average 5% in 2024, [and] 4.7% in 2025 and 2026."

BofA Securities added that it expects consumer inflation in South Africa to be close to the SARB's mid-point target of 4.5% in both September and October.

The SARB targets an inflation rate of between 3% and 6%. - Fin24