The bottom line is that the Monetary Policy Committee (MPC) is not seen loosening monetary policy before the US Fed’s Federal Open Market Committee starts trimming. 

A looming Fed cut was still on the cards just a couple of weeks ago, but a key measure of US consumer sentiment hit its highest level in two and a half years, while US central bankers have signalled that inflation remains a central concern in the world’s largest economy. As a result, traders are betting that it won’t be cut before May.

Read more here: Fed won’t start rate cuts until May, traders now bet | Reuters 

“South African monetary authorities are unlikely to cut rates before the US Federal Reserve,” says Jee-A van der Linde, senior economist at Oxford Economics Africa. 

“With economic and financial conditions likely to remain volatile over the near term, we expect that the [SA Reserve Bank] will stay put during its first MPC meeting for 2024 … we expect the [SA Reserve Bank] will move up its first rate cut to Q3 2024 (versus the previous forecast date of Q4 2024). 

“The main reason for this comes down to our revision of US rate cuts with the Fed now forecast to start reducing rates in May 2024.” 

Maintaining a gap between US and South African rates makes the rand’s yield appeal more attractive, providing it with some support. And the SA Reserve Bank will be mindful of the fact that the domestic currency needs all the support it can get right now. 

The rand has weakened in 2024 to back above 19/dlr from 18.30/dlr at the end of December, and geopolitical tensions triggered by a looming Nato exercise are one factor behind its performance. 

“The rand has weakened … as the Russian-Ukraine war has prompted a Nato allies’ manoeuvre for February to May this year, named Exercise Steadfast Defender 2024,” Investec chief economist Annabel Bishop said in a commentary this week. 

“The escalation in geopolitical tensions has caused risk aversion in global financial markets to rise, weakening emerging market currencies and so the rand.” 

The exercise – to be held in Europe – will be massive. 

Bishop notes that it “… will include reportedly over 50 military ships including aircraft carriers and destroyers, over 80 fighter jets, drones and helicopters, over a thousand combat vehicles including tanks and infantry vehicles”. 

Moscow has reportedly described it as a drill designed “for confrontation with Russia”.

Perhaps Minister in the Presidency, Khumbudzo Ntshaveni will see Nato’s imperialistic hand at work here to collapse the South African economy?

In the more  sensible corridors of the SA Reserve Bank, the view will be not to pull any triggers in the face of volatility and uncertainty.

From the end of 2021 until the middle of last year, the MPC raised rates by 475 basis points, taking its repo rate to 8.25% and the prime lending rate to 11.75%. It has since been in a holding pattern. 

High rates are seen as a constraint to economic growth, but the terrible trifecta of the power, logistics and crime crises all have a more corrosive impact on this front. They also contribute to inflation by raising costs and – especially in the case of the logistics meltdown – creating shortages. 

Like the US Fed, the SA Reserve Bank has a laser focus on inflation – the former aims for 2%, the latter a 3% to 6% target range – and there are still plenty of price pressures in the global and domestic pipelines. 

Global shipping costs, for example, are soaring because of Houthi rebel attacks in the Red Sea. 

South Africa’s Consumer Price Index slowed year on year in November to 5.5% from 5.9% in October, but the SA Reserve Bank is far more comfortable with inflation at the midpoint of its range. 

December’s read will be released on Wednesday, but one data set does not swing the MPC. DM