Interest rate cuts expected towards the end of 2024

Garth Theunissen
Two of asset manager Ninety One's key fixed-income portfolio managers say that while the South Africa Reserve Bank (SARB) is probably at the top of its rate-hiking cycle, it may take almost a year before policymakers start lowering borrowing costs.

Malcolm Charles and Adam Furlan, fixed-income portfolio managers at the fund manager, which oversees R2.83 trillion in assets, said in a research note that the Reserve Bank will probably only cut rates towards the end of 2024.

This is despite an expectation of inflation remaining within the central bank's 3% to 6% target band for the foreseeable future, with price growth likely to be back at the midpoint of this range by the second half of 2024.

Potential impacts on oil prices as a result of the Middle East conflict will keep the [Reserve Bank] cautious for now, but rate cuts can be expected towards the latter parts of 2024.

The Reserve Bank has raised its benchmark lending rate by 475 basis points to a 14-year high of 8.25% since it began tightening monetary policy in November 2021 to curb an inflation rate that stayed above its 6% upper limit for 13 consecutive months. While inflation has since eased to an annualised 5.4% in September 2023, rates remain at the highest since 2009, prompting critics such as economist Roelof Botha to lambaste the Reserve Bank for its approach.

"The biggest obstacle, in the short term, to growth and job creation right now is the Reserve Bank's obsession with inflation targeting," Botha said during a panel discussion at an Absa Wealth conference in Johannesburg last week.

"That needs to stop - interest rates are way too high."

The Reserve Bank's scope to lower borrowing costs may improve as its US counterpart - the Federal Reserve - potentially nears the end of its own rate hiking cycle. Ninety One says the prospect of steady or even lower borrowing costs in the world's biggest economy could create more stability in the local bond market as it reduces the incentive for global investors to withdraw money from emerging markets in favour of dollar-denominated assets like US Treasuries.

Though US 10-year Treasury rates are only at about 4.62%, less than half the 11.53% available from SA bonds of similar maturity, the greater confidence investors have in the ability of the US to repay its debt and the relative safety of the dollar over the rand, makes US debt far more attractive to international fund managers. –Fin24