The rand remained stable over the weekend at a range of R18.38 - R18.41 against the US dollar, maintaining its rebound that started on 10 January, as the South African Reserve Bank (SARB) is poised to lower the costs of borrowing this month.
The SARB is expected to announce a 25 basis points rate cut on Thursday on the back of slower pace of inflation after the headline consumer price index increased to 3% in December from 2.9% in November, mainly driven by slower deflation in transport and increasing food inflation.
Consumer prices, one of the main factors for monetary policy decisions, remain at the lower end of the SARB’s 3-6% target range and still below the 4.5% midpoint for five consecutive months now.
Inflation is forecast to drift upwards in the months ahead on the gradual upturn in food and fuel prices off a very low base, , ending the year around 5% but still average a muted 4% in 2025.
The rand recovered further last week amid a broad-based US dollar retreat as the greenback continued to surrender this week, with pressure added by US President Donald Trump’s comments that he would “demand” lower interest rates.
Nedbank chief economist, Nicky Weimar, said the rand's course was highly dependent on the US dollar's trajectory as global investors see a strong US dollar as a major consequence of the changes in US economic policies.
Weimar said even after the rand's recent slide, the currency was still trading broadly within their fair value estimates based on purchasing power parity and emerging market risk premiums.
“Significant further rand strength would require a deeper downward shift in the country's sovereign risk premium, which only seems possible on material improvements in South Africa's fiscal metrics, structurally lower inflation, or meaningfully better domestic growth outcomes. We expect only gradual improvements on all these fronts over the year,” she said.
“So, we see the rand holding relatively steady against a range-bound, albeit quite strong, US dollar. In net terms, we expect the rand to become a mild source of inflation in the year's second-half. Given the unsettled global landscape, the downside risks to our rand forecast have undoubtedly increased.”
Meanwhile, economists have said the SARB’s Monetary Policy Committee (MPC) will deliver another rate cut amid cautious rhetoric, warning of mounting upside risks to the inflation outlook.
The consensus forecast is for a 25 basis points reduction, taking the repo rate down to 7.50% and the prime rate to 11% amid benign inflation outcomes of the past two months and a relatively subdued inflation outlook.
Another mitigating factor is that the US Federal Reserve has already reduced its policy rate by 100 basis points, while the SARB has only eased by 50 basis points, creating some space for another rate cut without placing the rand under too much pressure.
Zimele Mbanjwa, investment research analyst at FNB Wealth And Investment division, said while current readings of data suggest that there was ample space to cut interest rates, a forward-looking approach still dictates that Taylor rule projections will dampen the amount of interest rate cuts.
“Nevertheless, the MPC’s expectation that inflation will remain around 4.5% over the forecast horizon, should they remain intact, still supports a continued cutting cycle.
“In line with this, we see another 75 basis points worth of cuts delivered cumulatively over the first three meetings in the first half of 2025, starting with 25 basis points at [this] week’s meeting.”
BUSINESS REPORT