Ahead of the SARB’s policy decision today, a softer-than-expected CPI inflation print (3.2% y/y) sparked some speculation of a potential repo rate cut to 7.25%. Yet, this optimism is tempered by a confluence of uncertainties—Trump’s tariffs, South Africa’s pending budget finalisation, and escalating geopolitical tensions with the United States. The US Federal Reserve’s overnight decision to hold rates steady, driven by persistent uncertainties and an upward revision to its inflation forecast, further shapes the SARB’s deliberations. Despite pencilling in two additional rate cuts for later this year, the Fed’s cautious approach may steer the SARB toward restraint. While inflation hovers at the lower bound of the target range, potentially justifying further easing, such a move risks exacerbating vulnerabilities in the ZAR, possibly undermining long-term stability.
Against a backdrop of mounting inflationary risks—stemming from international uncertainties that could erode the ZAR, escalating electricity costs, a potential VAT hike, and diminishing base effects throughout the year ahead—the SARB faces a complex landscape to set rates in today. However, the central bank is unlikely to hasten further rate reductions. As articulated on multiple occasions, South Africa’s interest rate environment is not the primary impediment to economic vitality. Rather, the root causes lie in the nation’s persistent structural constraints and its protracted struggle to enact decisive, material reforms. In navigating these dynamics, the SARB is poised to adopt a measured stance, prioritising stability over premature monetary easing. The benchmark repo rate will thus likely remain unchanged at 7.50% today.
ZAR Markets
The USD-ZAR continues to pivot around its 200-day moving average at 18.1247 ahead of the SARB’s policy decision today. Should the SARB keep rates unchanged, as expected, there is unlikely to be a strong, sustained reaction in the market (notwithstanding the risk of short-term volatility). Of course, more cautious forward guidance from Governor Kganyago would provide some support to the ZAR, but he will likely be more inclined to give himself policy room by providing balanced guidance, given prevailing uncertainties. Expect the USD-ZAR to stick to its pivot around its 200-day moving average and the 18.2000 mark in the short term, barring any significant catalysts.
Global FX Markets
The U.S. dollar stabilised near year to date lows this morning after the Federal Reserve signaled two potential quarter-point interest rate cuts later this year, despite uncertainties surrounding U.S. tariffs under President Trump’s policies. The Fed maintained its benchmark rate at 4.25%-4.50%, with Chair Jerome Powell emphasizing a cautious approach, awaiting clearer economic signals amid expected slower growth and higher inflation. Traders anticipate 66 basis points of easing, with a July cut fully priced in, though analysts suggest the Fed will hold off until late summer due to persistent inflation and a robust economy. The yen strengthened slightly to $148.36 in quiet trade given the Japanese holiday while Sterling hit a four-month high of $1.3015 ahead of the Bank of England’s (BoE) expected decision to maintain rates, as UK inflation exceeds the 2% target, contributing to sluggish growth. The Australian dollar dropped 0.35% to $0.6335 after unexpected job losses in February, though the unemployment rate held steady, following the Reserve Bank of Australia’s recent rate cut and caution about further easing due to a strong labor market potentially fueling inflation.