Interest Rate reductions by The Reserve Bank are anticipated in July.

According to Bank of America, a Transnet bailout appears inevitable.

Considering domestic inflation is expected to decline due to lower international oil prices and a more dovish global environment, Bank of America (BofA) has penciled in a cut in interest rates by the SA Reserve Bank in the second half of the year.

However, the bank issues a warning about a worsening fiscal picture for the South African economy, noting that a Transnet bailout is likely along with potential policy instability brought on by the governing party’s waning popularity.

Tatonga Rusike, a senior economist at Bank of America, stated that this is contingent upon domestic inflation remaining moderate in light of declining global oil prices and rate reductions by central banks in developed economies.

According to Rusike, the Reserve Bank would start lowering rates in July, with a total reduction of 75 basis points in 2024 and an additional 50 basis points in 2025. This was stated in the bank’s Emerging EMEA: South Africa – election, cuts and budget report.

The repo rate will drop to 7% as a result.

The reduction is expected since headline inflation is still hovering in the middle of the 3%–6% goal range set by the SARB.

Market expectations indicate to a significantly steeper reducing cycle starting in May 2024, with cuts of about 100 basis points; yet, there are “domestic setbacks that could constrain earlier and more substantial cuts.”

These include doubts about Transnet’s declining performance, the magnitude of load-shedding in 2024, and the unpredictability of national election policies.

“The bad news is that, in contrast to the 475 bps of hikes from November 2021 to May 2023, the cutting cycle is likely to be shallow, with a cumulative 125 bps over two years to 2025,” according to Rusike.

Based on assumptions that the US Federal Reserve will lower rates sooner rather than later, Bank of America has modified its baseline rate reduction projections marginally.

“It is expected that the Fed will begin a 100 basis point rate decrease in March of 2024. In contrast to our prior baseline of 50 basis points, we believe that this earlier action would allow the Reserve Bank to reduce rates by 75 basis points in 2024.

Rusike’s comments echo those of Investec chief economist Annabel Bishop, who said interest rate cuts will only begin in the second half of 2024.

Bishop said financial markets tend to run ahead on exuberance and have probably overestimated how soon interest cuts will occur in the US and how deep they will be.

“The start of the US rate cut cycle is typically positive for investor appetite towards emerging market (EM) portfolio assets, bolstering EM currencies, but investor sentiment towards South Africa has been negatively affected by domestic issues,” she said.

Financial markets have begun to pull back on expectations of the timing of the first US interest rate cut after hawkish comments from Fed officials.

The previous 100% chance of close to two 25 basis point interest rate cuts in the US by the 1 May FOMC meeting has now dropped to around 87% chance of one.

South Africa’s market does not expect a cut in the first quarter of 2024. Instead, South Africa’s forward rate agreement curve factors in at least two 25-basis point cuts in the second half of 2024.

Bishop said the SARB tends to be on the hawkish side and will view the CPI inflation rate above 5.0% year-on-year as a disincentive to any interest rate cuts in the near term.

The SARB has communicated its determination to see CPI inflation be anchored around the mid-point – 4.5% – of the inflation target range.

The latest print came in at 5.5%, and inflation will likely remain above 5.0% until March, only reaching 4.5% in July.

Additionally, risks to the inflation outcome are to the upside, with CPI inflation likely to rise to around 5.8% in January.