A man holds South African rand notes on a counter. Picture: Karen Sandison/Independent Newspapers
Nicola Mawson
Ahead of last night's US Federal Reserve decision on interest rates, local economists were mostly expecting a 50 basis point (bps) cut, with some wavering towards 25bps, with either outcome likely to positively affect the local currency.
Bianca Botes, a director at Citadel Global, yesterday morning noted that the rand started the day at R17.59 to the dollar. By early afternoon, it had strengthened slightly to R17.54, just hours before the Fed’s decision.
Andre Cilliers, a currency strategist at TreasuryONE, said the local currency was trading at its strongest level this year. “It remains to be seen whether this level will hold and if the rand could push a little further and test the R17.5000 level before the Fed announcement.”
The question on everybody's lips, said Cilliers, was whether the cut would be 25bps or 50bps. “One thing that is clear is that there will be a cut, but the size of the cut has been a bone of contention, especially in the last couple of days.”
Cilliers added that TreasuryONE expected “some market volatility after the announcement”.
The first widely anticipated rate cut from the US in four years after it started hiking the cost of borrowing to its highest level in 23 years in March 2022 comes a day before the South African Reserve Bank announces its next decision on interest rates. Economists see lower inflation, which dropped further from 4.6% in July to 4.4% in August, as boding well for lower rates locally too.
Rate cuts in the US add more good news to the mix, as the rand will strengthen, while the oil price is softening – a precursor to even lower fuel prices.
Izak Odendaal, the chief investment strategist at Old Mutual, said that markets were usually choppy ahead of a big decision from the US Federal Reserve and the decision was bigger than most since it will be the first of the cutting cycle.
Ahead of the move, Odendaal said, there was some uncertainty as to the quantum of the cut, and investors would look for guidance on where interest rates are likely to settle in the months ahead. “The more dovish the Fed, the more we should expect the dollar to weaken, supporting emerging market currencies and the gold price,” he said.
“Oil should benefit too, but the oil market seems to be fixated on demand weakness in China and the likelihood of excess OPEC production,” Odendaal said.
Johann Else, Old Mutual chief economist, said the Fed was expected to cut by 50bps, with another 50bps in November and 25bps in December, with South Africa likely to follow a similar trajectory, although at 25bps, today, as inflation drops.
“More significant rate cuts in the US will help cement a 50bps rate cut in South Africa in November,” he said. By the end of the year, he anticipates a total of 75bps cuts locally.
Els added that the fact that the oil price remained low, hovering between $72 (R1264) and $73 a barrel, and the continued strength of the rand also leaned towards lower inflation and improves expectations of a rate cut today. He expected inflation to settle at 4% by the end of the year. “There is no inflationary pressure,” he said.
“It would be a severe policy error if the Reserve Bank doesn't cut by a total of 75 basis points,” he said.
Investec chief economist Annabel Bishop said over next year markets had priced in a full 2.5% in cuts in the US, which has strengthened the local currency. Investec expected the rand to average at R18 to the dollar this quarter, dropping to an average of R17.70 in the last quarter of the year.
BUSINESS REPORT