Rand under pressure as rate cut hopes dim

Published Jan 23, 2024


The rand yesterday plunged to its lowest in three months after precious metals prices slid on reduced hopes of rapid interest rate cuts by major central banks, particularly the South African Reserve Bank (SARB).

The local currency came under more pressure and traded around R19.20 to the US dollar most of yesterday, marking its lowest point since early October 2023, after ending the week at R19.01 to the greenback on Friday.

Investors this week are bracing for the release of inflation data and the first rate decision of the year by the SARB, with analysts anticipating the rates to remain unchanged as inflation risks remain.

SARB Governor Lesetja Kganyago said recently that inflation had remained more sticky than anticipated and that it would need to move closer to the target before monetary policy would be eased.

Old Mutual Group chief economist Johann Els said he anticipated the policy repo rate would remain unchanged at 8.25%, marking the fourth consecutive meeting without a rate change, with the prime interest rate currently at 11.75%.

Els cited ongoing upside inflation risks, including weaker global growth impacting the rand exchange rate and consequently, inflation, as well as potential threats to food prices from El Niño and the possible escalation in conflicts that could drive oil prices higher.

However, Els was confident that interest rates would be cut by March on further evidence of easing inflation, with a total reduction of 100 to 125 basis points possible throughout 2024.

“These lower inflation and interest rates, combined with the likely ongoing, albeit slow, job recovery, should assist consumers,” Els said.

“I am optimistic that 2024 will turn out to be somewhat better, even if still subdued, compared to 2023.”

In the US, the market is expecting the Fed to slow balance sheet run-off in March and end quantitative tightening in June while the European Central Bank is also likely to cut interest rates around June.

Investec chief economist Annabel Bishop pointed to escalating geopolitical tension as impacting the rand as risk aversion rose after as Nato announced plans for a largest preparatory exercise since the Cold War.

Nato said its “Exercise Steadfast Defender 2024” with the military exercise taking place in Europe will be the largest Nato exercise in decades, with participation from approximately 90 000 forces from all 31 Allies and good partner Sweden.

The military drill will reportedly include more than 50 military ships including aircraft carriers and destroyers, more than 80 actual fighter jets, drones and helicopters, more than a thousand combat vehicles including tanks and infantry vehicles.

“The rand has weakened to R19.21/USD, with escalating geopolitical tensions as the Russian-Ukraine war has prompted a Nato allies manoeuvre for February to May this year, named Exercise Steadfast Defender 2024,” Bishop said.

“The escalation in geopolitical tensions has caused risk aversion in global financial markets to rise, weakening emerging markets currencies and so the rand.”

Meanwhile, the JSE all share index was 0.4% down to 72 352 points as traders continued to assess the outlook for interest rates while also monitoring the ongoing earnings season.