South Africa is gearing up to align itself with other nations by contemplating interest rate cuts later this year.

Renowned economist Annabel Bishop, Chief Economist at Investec, predicts that the United States will initiate its first interest rate cut in the first half of 2024, with March being earmarked as a likely month for this significant economic move.

Anticipation of the U.S. interest rate cut has sparked expectations of a positive impact on the South African rand, which currently stands as a critical factor in monitoring local inflation developments.

The minutes from the U.S. Federal Open Market Committee (FOMC) meeting held in December, disclosed last week, urged a cautious and data-dependent approach to monetary policy decisions, throwing light on the uncertainty surrounding the interest rate outlook for the States.

Despite the disappointment in the markets regarding the absence of a clear trajectory, investors have factored in a 100% probability of nearly two 25 basis points interest rate cuts in the U.S. by May 2024, grounded in the belief that the minutes hint at an impending rate cut.

While not directly mirroring the FOMC, the South African Reserve Bank (SARB) tends to closely align its policies with those of the U.S., acknowledging the significant influence U.S. interest rates have on global markets, the rand, and subsequently, inflation.

Annabel Bishop emphasized that the SARB’s Monetary Policy Committee (MPC) has communicated a preference for Consumer Price Index (CPI) inflation to consistently average around 4.5% year-on-year before contemplating rate cuts. However, she added that the central bank would likely monitor the differential between South African and U.S. interest rates, anticipating it to widen first.

“If the U.S. cuts interest rates in the first half of 2024, particularly in March, the rand could gain strength as the interest rate differential between the U.S. and South Africa widens, assuming South Africa does not cut its rates simultaneously,” Bishop commented.

The economist also highlighted that South Africa’s inflation outlook for 2024 is fluctuating, with a slight increase expected in the initial months, succeeded by a downturn. Despite potential risks, the general trajectory points downward, with markets projecting an average of 4.5% for the year.

Bishop suggested that the sustained decrease in inflation, which the SARB eagerly awaits, is likely to materialize in the second half of 2024. She indicated that while inflation might temporarily return to approximately 5.8% year-on-year in January, a downward trend is expected, with estimates dropping to around 5.3% year-on-year in February and 4.7% year-on-year in March.

As South Africa eyes potential interest rate cuts in the latter part of 2024, Bishop acknowledged the presence of risks to the inflation rate but also noted the possibility of the SARB acting earlier if it gains confidence in maintaining control over inflation.

“It is too early to tell with 100% certainty if this will be the case yet,” Bishop cautioned. Nevertheless, under the current forecasts, no further interest rate hikes are anticipated in South Africa, with the prospect of rate cuts looming by the second half of 2024.