I have been positively surprised by the resilience of the rand in the context of acute market turmoil and increased domestic political risk in the first three months of this year.
The Reserve Bank is probably in the same position. Concerns about global turmoil in the context of then-escalating trade tensions likely explained the decision by the Bank’s monetary policy committee (MPC) not to cut rates at its March meeting. While somewhat understandable, the Bank’s reticence served to further delay much-needed monetary policy easing and put the it further behind the curve.
Had someone told me as this year started that the global growth forecast would be revised half a percentage point lower, which is what the IMF did in its flagship World Economic Outlook report in April, compared with January, I would have guessed the rand would be at least 10% weaker relative to the dollar. Add to that, local difficulties in passing the budget and the apparent fragility of the government of national unity, and I would have been even more bearish. In fact, the local currency is 5.6% stronger now versus the dollar compared with its value at the start of the year.
We are habituated to assessing the value of currencies relative to the dollar, but the policymaking in Washington DC has deeply undermined the dollar this year. In fact, capital flows have been out of US assets as global uncertainty has increased. Measured against the euro, emerging market currencies have shown strain consistent with the deterioration in the global outlook, and the rand has been no different. Against the euro, the rand is 4% weaker in 2025 to date, a trend that extends to most other currencies. However, unlike what the MPC feared, currency weakness has not derailed the dovish inflation path.
The negative shock to global growth and disagreement within Opec have depressed energy prices. Locally, better-than-expected rainfall in the latter part of the summer has led to a 12.2% unwind of the drought premium in maize prices. This should keep food inflation in check. The Treasury’s reversal on VAT has further helped the inflation outlook and price pressures outside the more volatile food and fuel inflation are non-existent. Adverse global demand effects from the global trade war, should they manifest, could further compress inflation forecasts.
In January, the MPC expected inflation would average 3.9% in 2025. The forecasts were revised to 3.6% in March. We estimate inflation could be below 3.4% in 2025 and expect the bank to adjust its own view accordingly at its MPC meeting next week. Inflation last printed 2.8% and we think stays below 3.0% for another two months. The quarterly average of the measure has been below 4.5% for four quarters and is expected to remain there for three more.
With a year of below target inflation, inflation at cycle lows and most importantly growth under pressure, the Bank appears decidedly behind the curve. The bank has cut rates 75 basis points in the current easing cycle, after a late start in September last year. At 7.5%, interest rates are at or slightly above neutral levels. Debates about policy of any kind are difficult. At any point policymakers are making decisions about a future and the appropriateness of any policy stance will only be known in the fullness of time.
It is easy to assert now that monetary policy has been too tight, but the MPC would not have known a year ago what we know now. Having said that, there is enough evidence now that easing is necessary and running policy tight now makes little sense.
Traders are betting that the MPC will cut another two times in increments of 25 basis points in the next two meetings, taking the repo rate to 7%. I suspect the repo rate will be even lower than this by the time this cutting cycle is through.
• Lijane is global markets strategist at Standard Bank CIB.
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