South African financial markets ended the week on better footing on Friday in spite of slightly softening after the SA Reserve Bank (SARB) left interest rates unchanged and warned about the upside risks to inflation.
The rand closed at R18.72 against the US dollar on Friday after weakening to R19.22/$1 earlier in the week, mainly supported by expectations of delayed rate cuts and mild weakness to the greenback.
The SARB’s Monetary Policy Committee (MPC) on Thursday maintained the repo and prime lending rates at 8.25% and 11.75% at its first meeting of the year, respectively.
The decision was unanimous for the second meeting in a row, suggesting that all members are confident that interest rates were restrictive enough.
Nedbank economist Isaac Matshego said their base case scenario was for the SARB to cut interest rates by a cumulative 100 basis points throughout 2024, with an initial reduction of 25 basis points at the May meeting.
“The rand reversed some of its losses from last week, albeit marginally…after the Monetary Policy Committee statement pointed towards the next move being a cut later this year,” Matshego said.
“Our forecast takes the repo rate to 7.25% and the prime lending rate to 10.75% by the end of the year. However, the uncertainty in our interest rate forecast is concentrated around the timing and pace of the anticipated easing.
“The SARB could shift the first rate cut out to July if the rand tumbles ahead of the elections, the US starts its monetary easing later than expected and/or geopolitical tensions escalate even further. Should these scenarios materialise, the SARB will likely err on the side of caution and only cut interest rates by 75 basis points over the year.”
Financial markets took the SARB’s forecast that inflation will dip to 4.4% only in the fourth quarter of 2024 as indicating a delay in the interest rate cuts, and this shift in market sentiment had added some strength to the rand.
Anchor Capital investment analyst for fixed income Casey Sprake said inflation was likely to rise in the short term, but they believed that the general trend for this year would be downwards.
Sparke said that rising inflation woull be primarily due to fuel price base effects for January.
“There may be a further uptick in the inflation print for February as the Central Energy Fund data on 23 January pointed to a higher-than-expected fuel price adjustment at the beginning of February because of higher oil prices and a weaker rand vs US dollar exchange rate,” Sparke said.
“Nonetheless, we continue to view food prices as a key upside risk given the various ongoing supply shocks, particularly ahead of the forecast El Niño weather pattern and amid relatively large swings in crucial commodity prices (including oil) and the rand exchange rate.”
Meanwhile, the US dollar softened after the annual core personal consumption expenditure inflation in the US slowed more than expected last month and personal spending topped forecasts, adding to further evidence of a soft landing scenario.
The US Federal Reserve (Fed) is widely expected to hold interest rates steady when it meets this week, but traders will zero in on Fed Chair Jerome Powell’s remarks for hints on the start of the easing cycle.
Investec chief economist Annabel Bishop said the markets were now expecting the first US rate cut with a 100% probability to happen in June, shifting from the May meeting.
Bishop said the markets would seek to gain insight, but the US monetary policy authorities were likely to retain a hawkish tone, focusing on bringing inflation down to the 2.0% year-on-year implicit target.
“The rand will remain beholden to the US inflation outcomes, with no notable chance of a US cut seen before May. The MPC meeting in South Africa also displayed a hawkish tone, particularly concerned about stabilising inflation at 4.5% year-on-year,” Bishop said.
“The rand has not seen much volatility against the key crosses either, and its recent stand-alone mild strength is likely due to the MPC keeping interest rates unchanged.”
Meanwhile, the JSE All Share index reverted early losses and gained ground to close about 1.4% higher at 75 084 on Friday, a level not seen since early January, following upbeat corporate results.