The rand gained favour in early trade today (2 November 2023) as an end to the US rate hike cycle is supported, and analysts approved of the National Treasury’s commitment to cost-cutting and fiscal discipline during the MTBPS.

On Wednesday, in the face of a multitude of pessimistic revisions, the medium-term budget policy statement (MTBPS) presented a “pragmatic outlook,” acknowledging the current circumstances, underscoring potential risks, and placing a strong emphasis on the imperative for fiscal consolidation, said Old Mutual economist Johann Els.

The National Treasury indicated its commitment to cost-cutting, with the expenditure ceiling dropping by R36.9 billion in 2024/25 and by a further R47.3 billion in 2025/26, which has added to the efforts to contain the fallout from lower revenue collections.

Additionally, the US Fed announced its decision to keep interest rates unchanged in the world’s biggest economy, weakening the dollar as investors perceived that the US central bank may be done raising rates.

The Fed’s chair, Jerome Powell, added that despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

However, “a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” he added.

Investec chief economist Annabel Bishop noted that this tightening of financial conditions adds to the expectations that the US has seen its last interest rate hike. In South Africa, no further interest rate hikes are likely this year either.

As a result of these two events, the rand strengthened in response, reaching R18.55/USD in some relief straight after the MTBPS release, and it’s currently sitting at R18.39/USD as of 2 November.

However, Rand Merchant Bank analysts said in a morning briefing that the USD/ZAR’s momentum is still solidly to the downside, but it has probably run too far too fast and needs some consolidation.

Bishop added that next year, South Africa is only expected to see an interest rate cut in Q3 2024 of 25 basis points, with the FRA (Forward Rate Agreement) curve slow in factoring in rate cuts for the country, but Investec continues to believe a 125bp drop will occur – beginning in 2024 and ending in 2025.

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