Commentary by Albert Botha: Head of Fixed Income at Ashburton Investments

Thinking about potential interest rate cuts by the South African Reserve Bank (SARB) is particularly difficult in the current environment of where things are consistently in flux.

Currently there is considerable uncertainty about the direction of global interest rates over the next couple of months, but both local and global rates are certainly in a downward phase over a longer time horizon - yet the exact timing of further cuts remains unclear.

Internationally, President Trump seems inclined to appoint a Federal Reserve governor who is more likely to support rate cuts, which would certainly reinforce this easing bias. Given the shift in South Africa’s inflation environment, together with the strong rally in the Rand, multiple repo cuts also appear likely domestically.

Currently, the South African repo rate is 6.75%. Over the next 12 to 18 months, the local markets are pricing in roughly three to four cuts of 0.25%, with expectations being that the repo rate will bottom in the 5.75%–6.00% range.

If the US Federal Reserve delivers more than 1% of cuts, the probability increases that South Africa could also end its rate cutting cycle nearer to 5.75%. Historically, the repo rate in South Africa has averaged about 1%–1.5% above inflation.

With local inflation expectations now firmly adjusting downward toward 3%, a 1.5% premium over that level would imply a 4.5% “equilibrium” rate. It is important to remember, however, that these historical averages were largely formed in a period where global real interest rates were below zero, so we need to adjust our number upwards a world of structurally higher real rates.

If global policy rates continue to fall and the SARB remains firmly in control of inflation, South Africa could see a long term average repo rate around of around 5.5%. This would be a significant boon for the local economy, particularly the housing market, and would also support both corporate and government borrowers through structurally lower funding costs.

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