SA and US interest rate cuts on the cards in September
If all goes well, SA and US borrowers can look forward to an at least 25-basis point (bp) reduction in interest rates, spelling the beginning of a declining interest rate cycle. There are hopes that one or both central banks will announce a bumper 50-bp cut at one of their upcoming meetings, with analysts believing this would be justified because of the restraint shown by the central banks over the past year. But investors aren’t yet pricing this in.
What are the central bankers saying?
SARB Governor still circumspect, investors optimistic: While the SA Reserve Bank’s Governor Lesetja Kganyago has struck a circumspect tone, a lower-than-expected July inflation rate sets the scene for a long-awaited rate cut – and possibly further rate cuts before year-end. However, economists caution that the South African rate-cutting cycle will likely slow.
Kganyago is still concerned about inflation risks. He last said at the central bank’s annual meeting that inflation remains a major policy concern for central banks. However, he acknowledged that lower inflation would “open monetary policy space and support easier credit conditions.”
US Fed chair says the time has come: Meanwhile, in the US, Federal Reserve chair Jerome Powell couldn’t have been clearer, saying “the time has come” for rate cuts. The US central bank has more reason to fast-track its rate-cut trajectory than SA. Signs of a tightening labour market are raising concerns that unemployment rates could rise if the central bank doesn’t soften its hold on monetary policy.
The bottom line: From a macroeconomic perspective, the interest rate outlook looks bright, with a September rate cut considered highly likely in the US and a firm possibility in SA. However, investors should maintain a stance of cautious optimism because of the mounting geopolitical risks clouding the global landscape.
As August came to an end, Israel and Hezbollah, a proxy for Iran, were exchanging heavy fire in what is considered a major escalation that raises the potential of an all-out war. The Middle East hostilities pose the most significant risk to the interest rate and inflation outlook due to the impact they would have on oil prices.
What would a cut mean for investors
While the impact of an interest rate cut will vary depending on your circumstances, here are a few ways interest rate cuts typically tend to play out.
- Equity: It could be a good time to invest in shares – especially if companies borrow more for growth, resulting in better dividend returns.
- Property: You’ll probably pay a bit less on your home loan, but this isn’t the only good news. It’s also highly likely that lower interest rates will increase property prices as the demand for property increases following more affordable mortgages.
- Bonds: Existing bonds may increase in value as fixed-interest payments become more attractive. While it might not be the best time to buy bonds, there will always be a demand for low-risk investments – whether for low-risk investors (of all ages) or retirees
- The big picture: From a macroeconomic perspective, lower interest rates may boost consumer spending and spur economic growth in general.
NB: The generalised trends above are just that. If you have any questions about how all of this affects your investment portfolio, please give us a ring.
Jason Yutar: +27 83 415 9603 or
Zaheera Mohammed: +27 82 775 1898
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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