One step closer to repo rate cut in September

A repo rate cut in September is one step closer after the chair of the United States (US) Federal Reserve said in a speech on Friday that the time has come for the US interest rate-cutting cycle to begin. South Africa usually follows the US to cut or hike the repo rate.

US Fed Chair Jerome Powell said at the Jackson Hole Economic Policy Symposium “the time has come for policy to adjust. The direction of travel is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”

He also highlighted that “the current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labour market conditions.”

Annabel Bishop, chief economist at Investec, says this was good news for the rand too as it temporarily moved below the R17.70/USD resistance level.

“Markets have strengthened on the affirmation from US monetary policymakers that the recent weakening in the US labour market is in particular focus and that the Fed will not fail to act substantially to avoid substantial economic weakness.”   

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Good news for the rand

Powel specified that “with an appropriate dialling back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labour market. We will do everything we can to support a strong labour market as we make further progress toward price stability.”

Bishop says the move to a dovish stance saw the rand and other risk assets gain, as risk aversion subsided. “Powell’s speech has calmed markets, allowing for a reassumption of risk-taking, which could see the rand strengthen further this week.

To date, the rand has averaged R18.19/USD and we continue to expect the rand to average R18.00/USD this quarter, although volatility will always remain a risk for the domestic currency, particularly following weak US data prints.”  

She notes that the rand saw a pullback into the R17.80/USD to R17.85/USD range today, bouncing back from the R17.70/USD key resistance level, but could make further progress this week influenced by the outcome of the US core PCE inflation data.

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US inflation going back to 2%

Powell also noted that “our efforts to moderate aggregate demand and the anchoring of expectations have worked together to put inflation on what increasingly appears to be a sustainable path to our 2% objective.

“The summer of 2022 proved to be the peak of inflation. The 4.5% decline in inflation from its peak two years ago has occurred in a context of low unemployment—a welcome and historically unusual result.”

He said the healing from pandemic distortions, their efforts to moderate aggregate demand and the anchoring of expectations have worked together to put inflation on what increasingly appears to be a sustainable path to their 2% objective.”

Bishop says the greater confidence shown by the US monetary policy authorities in containing inflation has added to the positive sentiment. “Markets continue to factor in a 25 basis points cut on 18 September in the US.”

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Expectations in SA for repo rate cut of 25 basis points

“South Africa has seen expectations increase for a cut in the repo rate of 25 basis points on 19 September, which has caused some rand weakness, as it would prevent a widening in the interest rate differential between South Africa and the US.

“That is, when the US cuts its interest rates, without a repo rate cut in South Africa, the drop in US interest rates in comparison to South Africa’s interest rates makes the rand stronger, while a South African repo rate cut straight after the US meeting instead weakens the effect.”

According to Bishop, rates of return are important for investors and increased expectations for a repo rate cut in South Africa will have a weakening effect on the rand, with the latest inflation print aiding expectations for a sooner interest rate cut in South Africa.