Bank of America expects the South African Reserve Bank (SARB) to only cut rates in the second half of the year, with the first cut in July. 

Senior economist at Bank of America Tatonga Rusike said this depends on domestic inflation continuing to moderate on lower global oil prices and central banks cutting rates in developed markets. 

Rusike said in the bank’s Emerging EMEA: South Africa – election, cuts and budget report that the Reserve Bank will begin to cut rates in July, with a total of 75 basis points cut in 2024 and a further 50 basis points in 2025. 

This will take the repo rate down to 7%. 

The cut is anticipated because headline inflation continues to cool to the midpoint of the SARB’s target range of 3% to 6%. 

While the market expects a much steeper cutting cycle, with nearly 100 basis points cut in 2024 beginning in May, there are “domestic setbacks that could constrain earlier and more substantial cuts”. 

These include uncertainties regarding the severity of load-shedding in 2024, Transnet’s deteriorating performance, and policy uncertainty surrounding the national elections. 

“The bad news is that the cutting cycle is likely to be shallow – a cumulative 125 bps over two years to 2025 compared with 475 bps of hikes from November 2021 to May 2023,” Rusike said.

Bank of America has slightly changed their expectations for rate cuts from its previous baseline due to expectations that the Federal Reserve in America will cut rates sooner. 

“The Fed will likely cut about 100 bps in 2024 starting in March. In our view, this earlier move would give the Reserve Bank room to cut 75 bps in 2024, compared with our previous baseline of 50 bps.”

Rusike’s comments echo those of Investec chief economist Annabel Bishop, who said interest rate cuts will only begin in the second half of 2024. 

Bishop said financial markets tend to run ahead on exuberance and have probably overestimated how soon interest cuts will occur in the US and how deep they will be. 

“The start of the US rate cut cycle is typically positive for investor appetite towards emerging market (EM) portfolio assets, bolstering EM currencies, but investor sentiment towards South Africa has been negatively affected by domestic issues,” she said.

Financial markets have begun to pull back on expectations of the timing of the first US interest rate cut after hawkish comments from Fed officials. 

The previous 100% chance of close to two 25 basis point interest rate cuts in the US by the 1 May FOMC meeting has now dropped to around 87% chance of one. 

South Africa’s market does not expect a cut in the first quarter of 2024. Instead, South Africa’s forward rate agreement curve factors in at least two 25-basis point cuts in the second half of 2024. 

Bishop said the SARB tends to be on the hawkish side and will view the CPI inflation rate above 5.0% year-on-year as a disincentive to any interest rate cuts in the near term.

The SARB has communicated its determination to see CPI inflation be anchored around the mid-point – 4.5% – of the inflation target range. 

The latest print came in at 5.5%, and inflation will likely remain above 5.0% until March, only reaching 4.5% in July. 

Additionally, risks to the inflation outcome are to the upside, with CPI inflation likely to rise to around 5.8% in January.  

“We continue to forecast South Africa’s first interest rate cut in H2 2024,” Bishop said.