This week’s focus will be on the South African Reserve Bank’s Monetary Policy Committee meeting, which starts tomorrow and ends with an interest rate decision on Thursday. It is widely expected the Reserve Bank will commence its cutting cycle and reduce interest rates by 25 basis points to 8 per cent followed by a similar cut in November. Annabel Bishop, Chief Economist at Investec joins CNBC Africa for more.
This week’s focus will be on the South African Reserve Bank’s MPC meeting, which starts tomorrow and ends with an interest rate decision on Thursday. It is widely expected the Bank will commence its cutting cycle and reduce interest rates by 25 basis points to 8 per cent followed by a similar cut in November. For more on what to expect, we are joined by Annabel Bishop, Chief Economist at Investec. Annabel, thank you so much for your time. Between the last July MPC meeting and where we are right now, what are some of the aspects, when you look at things from a macroeconomic perspective, that have changed? Look, I think in particular it's been the inflation forecast of the South African Reserve Bank. And that's, of course, very, very important because their interest rate cuts depend on their expectations for inflation. If we actually have a look at what the expectations are, the South African Reserve Bank now expects to see inflation running around 4.5 per cent, if not below it, over their forecast period. And, of course, that's a big difference compared to a couple of meetings ago. This means that the South African Reserve Bank could cut interest rates with confidence this week after the Fed is expected to have cut on Wednesday. We see our cut on Thursday. When you look at inflation expectations, some economists will still, you know, emphasise the fact that it's still too high, but they tend to be backward-looking. How much emphasis do you place on inflation expectations, given that it's a bit of a mixed picture right now? It is a mixed picture. And I think, you know, you're quite right in indicating that they are obviously influenced by the backward-looking nature that people sometimes have, because they may have been through high inflation. They feel, well, inflation was high, it may be high going forwards, or it may remain high-ish. So, of course, you know, that is one concern. But the forecast that we have, that economists have, and, of course, the Reserve Bank has, does indicate a better outlook for inflation. Since that last MPC meeting, we've seen the RAND hold relatively steady. Take me through some of the developments that have contributed to what we're seeing right now when we look at the currency. Yes, you know, certainly for us in South Africa and for all emerging market economies, it's very positive when the United States goes into an interest rate cutting cycle. And, of course, that's the situation that we're in now. The United States hiked its interest rates over 5% in 2022 and 2023, and, of course, is now expected to cut them over the next 12 months by even up to 250 basis points. That's 2.5%. So, you know, that, of course, creates a lot of positivity in financial markets. And for emerging markets in general, there has been some risk on. There's also been some U.S. dollar weakness. And, of course, you know, that does tend to happen when the United States is looking to cut interest rates or does go into an interest rate cutting cycle. South Africa's interest rate cuts are expected to be less than those in the United States. And this, too, is providing some benefit to the RAND. What do you make of these shifting sentiment or call it the repricing when we look at things stateside and we look at what the expectations are from the Fed in terms of 25 or 50 basis points? Because it's been quite interesting to follow the conversations around what markets are expecting. So, interestingly, today, at the moment, the Fed funds futures, the markets are pricing in a 40 basis point cut. And we know that's not going to happen. We know that would happen in increments of 25. So, we'd either get a 25 or a 50 basis point cut. So, the 25 basis point cut is factored in. That's what's expected to happen. But, of course, as well, the 40 basis points really indicates how positive or how strongly financial markets believe that 25 basis point cut will occur. Of course, there are some market participants or some economists who are expecting slightly more. They're expecting that 50 basis point move. Overall, though, the central bank in the United States and, in fact, central banks around the world have talked about gradualism, about not cutting interest rates too fast, too quickly, of course, of watching the economic data as well unwind as they go into interest rate cutting territory. And really, for these reasons, also given that inflation is still quite elevated in the United States, we wouldn't expect more than a 25 basis point move. If we did get that 50 basis point cut, I mean, what signal would that send to, I suppose, economists such as yourself? Would you be concerned that the Fed is seeing something you're not? Well, that's exactly what financial markets might fear. They might fear the Fed seeing something that they're not, and there might be worries resurface of a recession. And that, of course, sometimes is the output or the result when a central bank cuts by more or less than markets expect. Markets might panic. They might feel the Federal Reserve Bank is much more worried about the economy, perhaps about the labor market and other areas than was expected. And, of course, this actually could cause some financial market instability. So, central banks, whether in South Africa or in the United States, do watch financial market expectations quite closely. And, of course, if financial markets only expect a 25 basis point cut or move, it's unlikely for them to do much differently. And the hiking cycle, we often spoke about the long and variable lags when it comes to interest rate hikes. Does the same still apply in a cutting cycle, those long and variable lags? It very much depends on the cycle itself, you know, if it's a slow or a faster cycle. I think central banks are worried that if they cut too soon, particularly in the United States, for example, where they haven't yet got inflation back to the midpoint or really to the implicit target, rather, of 2%, that they might find inflation proves to be even more stubborn. So, you know, the lagged effects of interest rate cuts, you do obviously, or hikes, you do obviously see those go through from two to three quarters, sometimes, you know, quite a bit longer after two years. And that certainly has an impact. Now, that's positive for South Africa, because it means that our interest rate cutting cycle that we're expected to embark on this month as well, and over next year and into 2026, is expected to have a fairly significant impact on the economy for a fairly lengthy period. But of course, you're quite right, you know, cutting interest rates, if you want to see what is the interest rate cut achieved, there is that lag you have to wait for, and particularly the first interest rate cut when it's quite small, often doesn't have very much impact, although on confidence it may, but on the economic data itself, could be quite limited. When we look at the MPC, they've only got two meetings left, and we are expecting 25 basis points in this meeting. For the November meeting, the size of the cut, what will it depend on? For South Africa, we expect another 25 basis point cut as well. Much will depend on what the United States does. They have three meetings, November and December, but also, of course, as well, what happens in terms of inflation. South Africa's inflation surprised some, coming out at 4.6% recently, down from 5.1%. We expect it will either remain at 4.6%, or even move slightly lower in the next print to around 4.5%, which is where the South African Reserve Bank wants it. And given their forecast, are they looking for inflation to be similar, if not lower, over the medium to longer term? That should support their interest rate cuts. If we actually look at our inflation forecast, we expect inflation to be below 4.5% in the fourth quarter of this year, and again, that's very supportive of the South African Reserve Bank making its interest rate cut now, and again, another one in November. But of course, they will look at the data coming out between then and now to make their final decision.
Theme: South African Reserve Bank's Interest Rate Cut Amid Improved Inflation Forecasts
This week, all eyes are on the South African Reserve Bank's Monetary Policy Committee (MPC) meeting, which is set to begin tomorrow and conclude with an interest rate decision on Thursday. It is widely anticipated that the Reserve Bank will kickstart its cutting cycle by reducing interest rates by 25 basis points to 8 percent, with a similar cut expected in November. Annabel Bishop, Chief Economist at Investec, joined CNBC Africa to discuss the factors driving this decision. One of the key aspects that have changed since the last July MPC meeting is the inflation forecast of the South African Reserve Bank. The Bank now expects inflation to hover around 4.5 percent, if not lower, over their forecast period. This marked improvement from previous expectations gives the Reserve Bank the confidence to proceed with interest rate cuts, especially following the anticipated rate cut by the US Federal Reserve. While some economists may argue that inflation expectations are still high, current forecasts paint a more optimistic picture, supporting the case for rate cuts. The stability of the South African Rand has also played a role in the decision-making process. As the US embarks on an interest rate cutting cycle, emerging markets like South Africa benefit from increased positivity in financial markets and a weaker US dollar. Though South Africa's rate cuts are expected to be less aggressive than those in the US, they are still seen as advantageous for the Rand. The conversation surrounding the US Federal Reserve's expected rate cut of 25 or 50 basis points has caused a ripple in markets. While a 25 basis point cut is largely priced in, some market participants anticipate a larger move. However, the gradual approach adopted by central banks globally suggests that a 25 basis point cut is more likely, given the current economic conditions and inflation levels. Amid concerns over potential market instability, central banks closely monitor financial market expectations to calibrate their policy decisions effectively. The long and variable lags associated with interest rate changes apply not only to hiking cycles but also to cutting cycles. The impact of rate cuts may take several quarters to materialize fully. As the South African Reserve Bank navigates its cutting cycle, the effects on the economy will unfold over an extended period. Looking ahead, South Africa is expected to see another 25 basis point cut in November, depending on developments in the US and local inflation rates. With inflation expected to remain below 4.5% in the coming months, the Reserve Bank is likely to continue its rate-cutting trajectory to support economic growth. The final decision will be based on the evolving economic data leading up to the November meeting.
"The long and variable lags associated with interest rate changes apply not only to hiking cycles but also to cutting cycles. The impact of rate cuts may take several quarters to materialize fully."
South African Reserve Bank, Interest Rates, Inflation Forecast, US Federal Reserve, Rate Cut, MPC Meeting, Economy, Rand, Financial Markets, Global Economy, Central Banks