Longer wait for Interest Rate cuts in South Africa
The US Federal Reserve decided to keep interest rates the same, which means they will stay high for a longer period. This may delay South Africa's plans to lower rates.
Positively for South Africa, the US dollar weakened on the announcement, benefitting emerging market currencies like the rand.
The rand got stronger on Thursday and Friday, reaching R18.54/$ against the dollar. This happened because the Fed didn't change its benchmark rate and expressed worries about inflation.
The local currency was also bolstered by better-than-expected vehicle sales data. Further support stemmed from the improvement in the country’s electricity situation with load-shedding being suspended for over 35 days.
Jerome Powell, the Fed Chair, stated that interest rates will not increase. However, rates may need to remain elevated for some time. This provides insight into future expectations. This gives some clarity on what to expect in the future.
Lowering rates too soon could cause inflation to increase. Keeping rates high for too long could result in more economic hardship in the future.
The US is expected to see higher interest rates soon, which will start affecting the economy in 2024.
Locally, households are feeling the impact of high interest rates. South Africans are relying on credit cards as banks are lending less.
Banks are making it harder for people to borrow money because more people are not paying back their loans. Nedbank says this is because of high inflation and a lot of people not having jobs.
The Fed’s position is increasingly tighter. The committee said it won't lower interest rates until it's sure inflation is steadily heading towards the 2% goal.
In South Africa, this has been the message from the South African Reserve Bank at all its meetings since it first started holding rates in May 2023. Reserve Bank governor Lesetja Kganyago has repeatedly stated that the bank will not make policy moves until inflation is under control. Therefore rates unchanged will continue to put strain on households till much later this year.
Given that the Fed is maintaining the current interest rates, it further increases the probability that South Africa's rates will remain at their highest in 15 years for an extended period. This is anticipated to be confirmed at the Monetary Policy Committee meeting set for May 30.
Nedbank is hopeful that interest rates will be cut in 2024. They predict a 25 basis point cut at both the September and November meetings. Nonetheless, some analysts have begun to dismiss the possibility of rate reductions this year, shifting the commencement of the reduction cycle to 2025.
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