SARB Governor Lesetja Kganyago last month refrained from committing to any forward guidance, stating that policy ‘decisions will continue to be outlook dependent’. Picture: Thobile Mathonsi/Independent Newspapers
S&P Global has cautioned that the South African Reserve Bank (SARB) could start slowing down the pace of interest rate cuts this year and the next to match interest rate differential with the US following a recent change in its policy rate forecast for the US.
The ratings agency on Wednesday revised its policy rate forecasts for nine key emerging markets, including South Africa, based on the interest rate differential between emerging markets and the US, a key driver of capital flows.
Elijah Oliveros-Rosen, S&P chief economist for emerging markets, said they were now expecting just one 25 basis points rate cut from the US Federal Reserve this year, compared with three 25 basis cuts in their previous forecast.
“Central banks in many key emerging markets have been lowering their policy rates for more than a year. We now expect these central banks to be cautious about cutting rates, to prevent a rapid narrowing of their countries' interest rate differentials with the US,” Oliveros-Rosen said.
“S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the US administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty.”
For South Africa, S&P is forecasting one more 25 basis points cut from 7.50% to 7.25% per annum for 2025, further declining to 6.5% per annum in 2026.
The SARB’s Monetary Policy Committee (MPC) cut the benchmark repo rate by 25 basis points in January for the third consecutive meeting following the end of the rates hike cycle that began in November 2023.
Jee-A Van Der Linde, senior economist responsible for South Africa at Oxford Economics Africa, on Thursday said the course of policy going forward remained uncertain.
Oxford Economics Africa changed its view on the SARB's future policy path slightly following the January MPC meeting, and now expects only one more 25 basis points cut in 2025.
“It is unclear though when the next cut might happen, with the Sarb expected to be more cautious in the coming months. Moreover, the US Federal Open Market Committee's (FOMC) recent decision to pause rate cuts might mean that the Sarb will also take its time to adjust its policy stance,” Van Der Linde said.
“The near-term inflation outlook is benign, with the headline rate likely to ratchet up gradually throughout H1 2025 before it breaches the midpoint of the target band in Q4 2025.”
SARB Governor Lesetja Kganyago last month refrained from committing to any forward guidance, stating that policy "decisions will continue to be outlook dependent, responsive to data developments, and sensitive to the balance of risks to the forecast".
Kganyago also noted that the space for rate cuts by the Fed looked limited, with core inflation still elevated and new inflation risks emerging, such as rising tariffs on trade. “It is even possible that US rates could go up again, to stabilise inflation,” he said.
Market expectations have been pushing out the timing of the next US rate cut to September now for a 25 basis points cut with 100% or more certainty, from July previously at the turn of the month, and June earlier this year, as the US interest rate cycle is flattening.
“The push out in the timing in market expectations for US interest rate cuts has a significant effect on the US dollar, and so the rand, but key remains the outcome on US tariffs, with markets recalibrating to a more subdued outlook,” said Investec chief economist, Annabel Bishop.
“US interest rate cuts benefit the rand by weakening the US dollar, with the January FOMC meeting seeing no change in US rates, and the same expected at the next FOMC meeting which is on March 19th.”
However, other economists were of the view that the SARB has ample scope to cut interest rates again this year, given rates were still modestly restrictive and domestic inflation was not a problem.
Momentum Investment chief economist, Sanisha Packirisamy, saidd that the SARB possibly has room to cut once more in the cycle based on the outlook for inflation and risks to the inflation outlook.
PPS Investments portfolio manager, Reza Hendrickse, concurred that lower rates would also be helpful from an economic growth perspective given South Africa’s fiscal position, which the Budget saga has cast a spotlight on.
“The challenge is external risks have risen in recent months, which the MPC may reference to help justify a pause at this point. We have sympathy for the market’s current view that the odds of a cut at the next meeting are low,” he said.
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