The fast view
- The South African Reserve Bank’s (SARB’s) monetary policy committee (MPC) held rates steady as expected, but better data locally and globally will keep the possibility of a September cut at least partially priced in by the market.
- The inflation outlook has improved somewhat, but risks are to the upside.
- A key question is whether the SARB will move ahead of the US Federal Reserve (Fed), taking the first step to cut interest rates in September.
- Money market rates are now pricing in a cutting cycle of approximately 100 basis points over the next 15 months. If history is anything to go by, this is likely too conservative.
- There is still an opportunity for yield-seeking investors with a longer time horizon to benefit from the current rate environment.
Globally, short-term interest rates have largely peaked as inflation generally continues to moderate towards targets, albeit slowly and with some stickiness. South Africa is also squarely in this camp. Thursday’s MPC meeting saw rates stay at 8.25% as expected, with the committee decision split as two members voted for a cut. While this meant the market has had to price out the small probability of a cut in July, it will continue to price in some probability of a cut at the next meeting on 19 September.
The SARB’s inflation forecast moderated further on the back of contained food prices, with the stronger rand helping to lower fuel prices. Inflation is now expected to reach the mid-point of the target over the next few quarters, against a backdrop of still subdued growth. Although there is growing noise around realigning South Africa’s inflation target to the low end of the current target range, we believe that this will need to be formally amended before the MPC can actively target it. This means that monetary policy in South Africa is now looking restrictive, and this is opening the way for the SARB to begin its long-awaited cutting cycle.
The burning question the market is now toying with is whether the MPC, given its new composition and the hawkish leadership of Lesetja Kganyago, could take the first step in cutting rates at its September meeting. While Fed speak has turned more dovish recently in response to softer data, and it appears that the time for a policy adjustment is nearing, a move at the end of July is not the market’s base case. The monetary policy meeting dates of the Fed and the SARB overlap in September. The SARB will go public on its rate decision on 19 September, but the decision will have been made the day before, potentially only hours before the Fed’s press conference on the evening of 18 September. Given the more conducive South African domestic backdrop, our view is that any further softening of US data and Fed rhetoric ahead of its own September meeting will be enough to tip the balance towards a SARB cut.
Post South Africa’s recent rate decision the market is now pricing in a cycle of slightly less than 100 basis-point cuts over the next 15 months. As we have highlighted in a previous article, our analysis of over 70 global interest rate cycles over the past 20 plus years has taught us two things: Firstly, markets generally underestimate hiking cycles, and secondly, they underestimate the speed and magnitude of the cutting cycle. We do not expect the South African cutting cycle to buck this trend.
With this in mind, and given the relative attractiveness of yields across the curve relative to their history, we believe that money market funds remain compelling. Investors have the opportunity to improve the yield earned on their cash while still maintaining daily liquidity. However, investors who have an ability to extend maturity and have marginally more appetite for return, can benefit more by a move into STeFI-plus type products. These offer an attractive yield gap while still maintaining liquidity. There is also scope to benefit modestly from capital appreciation as short-term yields fall.
