Interest Rate Developments expected next week

The South African Reserve Bank (SARB) is poised to emulate the approach of the US Federal Reserve by maintaining current interest rates during its upcoming meeting.

Scheduled for next Thursday, 23 November, the SARB’s Monetary Policy Committee (MPC) will deliberate on interest rates, with the prevailing repo rate standing at 8.25%. Against a backdrop of notable currency fluctuations, exemplified by a recent shift from R18.80/$ to R18.20/$ on 14 November, expectations regarding US interest rates have played a significant role in driving the volatility of the rand.

Investec Chief Economist Annabel Bishop suggests that US interest rates may have peaked in the current cycle, influencing global financial markets and contributing to rand fluctuations. The recent dip in US inflation data for October, from 3.7% to 3.2%, weakened the US dollar and provided a positive boost to the rand.

While acknowledging the potential for another 25 basis point hike in both South Africa and the USA, Bishop points out that the narrowing differential between South African and US interest rates, currently at 2.75%, contributes to rand weakness and inflationary pressures.

Foreign investors have displayed significant interest in South African bonds this quarter, with purchases amounting to R17.5 billion. This quarter’s influx contrasts with the R5.1 billion outflows witnessed in the initial three quarters of the year, bringing the year-to-date total to R12.4 billion.

The prevailing sentiment in markets indicates an increased risk appetite, driven by the belief that the US interest rate hike cycle has concluded. This has consequently bolstered emerging market portfolio assets, including South African bonds.

Consumer Price Inflation in South Africa is expected to ease from its current level of 5.4% y/y (near the upper limit of the SARB’s target range of 3% to 6%) and average around 4.6% in 2024. Given the recent rand appreciation, Bishop anticipates no immediate need for an interest rate hike in South Africa, with the SARB likely to adopt an overall hawkish tone.

However, the primary focus remains on the US, particularly incoming economic data such as inflation and jobs data, as market participants exhibit an increasing appetite for risk-taking, anticipating further strength in the rand as additional US interest rate hikes are not anticipated.