Repo rate cuts in South Africa and the US: challenges and opportunities

The repo rate cuts in South Africa and the United States last week provided some breathing room for over-indebted consumers. However, both countries face numerous difficulties in addressing their respective challenges and opportunities.

“The Fed’s decision to cut interest rates by 50 basis points was bold but widely expected, as recent economic data and Fed communications made it clear that a rate cut was imminent. The real debate was about the size of the cut and whether markets could expect a 25 or 50 basis point cut.

“The markets responded positively to the larger cut. US stocks rose and, as a result, the dollar weakened,” says Maarten Ackerman, chief economist and advisory partner at Citadel.

He also notes that markets are now expecting further rate cuts, which could provide additional support to the U.S. economy. “These cuts are likely to support consumer confidence and help protect the global economy from geopolitical risks and sluggish growth.”

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The Reserve Bank was more cautious and cut interest rates by 25 basis points.

Ackerman says the Sarb’s decision to cut interest rates by 25 basis points was more cautious than expected, especially since inflation is already within the target range. “While some had expected a more aggressive cut of 50 basis points, the Sarb opted for a more dovish approach due to South Africa’s unique economic challenges.”

“While the 25 basis point cut is a step in the right direction, South Africa’s economy needs further rate cuts to stimulate growth and ease pressure on consumers. This decision followed an intense internal debate, with some committee members in favour of a half-point cut while others argued for leaving interest rates unchanged.”

What do the repo rate cuts mean for investor sentiment and economic growth? Ackerman points out that the recent cuts, although modest, should improve investor sentiment, particularly towards South African equities.

However, he stresses that interest rates alone will not be enough to stimulate any significant foreign direct investment unless structural problems such as energy security, efficient logistics and crime are adequately addressed.”

“To unlock South Africa’s economic potential, these long-standing challenges must be addressed. Lower interest rates can provide some stimulus, but without structural improvements, growth will remain constrained.”

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What does this mean for South Africa’s position in global monetary policy?

Ackerman says Citadel has observed that central banks around the world are beginning to ease monetary policy as inflationary pressures ease.

“This easing should provide some support to global growth and indirectly benefit South Africa. However, ongoing global risks such as trade tensions and China’s changing role in manufacturing will continue to impact global economic activity.”

He stresses the importance of accelerating structural reforms in South Africa. “South Africa is likely to benefit from global tailwinds, but if local problems are not addressed, the country’s growth potential will remain limited.”

Looking ahead, Ackerman sees both opportunities and risks for South Africa. “As we approach the final quarter of 2024, the positive sentiment surrounding the government of national unity is leading to strong performance from local asset classes, including bonds, equities and the rand, which have outperformed many other emerging markets.”

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Upcoming medium-term budget statement poses a critical challenge

However, he warns that the upcoming medium-term budget policy statement (MTBPS) is a critical challenge. “Despite the optimism, fiscal issues such as low tax revenues and high social spending continue to pose risks. The MTBPS will be a crucial test that could change market sentiment.”

Ackerman advises investors to remain balanced in their strategies. “While there are buying opportunities in local and global markets, investors should remain cautious. Valuations are not cheap and global economic growth is slowing. Fixed income is still an attractive option and offers strong real returns, while gold continues to provide a valuable hedge against geopolitical uncertainty.”

He also highlights the exceptionally high real returns that Citadel clients are currently achieving, which significantly outperform inflation. “To give a picture, over the long term, a typical cash investment might match inflation or be slightly below it after tax.

“A bond investment would typically beat inflation by about 1%, while a full equity portfolio might beat inflation by about 6-7% over a three- to five-year investment horizon. However, currently many of our multi-asset funds beat inflation by 8-10%.

“This is an exceptionally strong real return by historical standards and is achieved with much less risk than investing entirely in equities. Even in a high inflation environment, we can achieve such returns by sticking to our disciplined process and investment philosophy.

“We generate alpha with equities, engage in active allocation and create additional value through our currency management overlay in our portfolios.”

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The importance of reforms for sustainable growth

Ackerman stresses the importance of reforms for sustainable growth in South Africa. “Recent interest rate decisions in the US and South Africa reflect broader global economic trends. While rate cuts offer some support, the path forward remains uncertain.”

“At the local level, the focus must be on accelerating reforms to unlock long-term growth potential. Lower interest rates are helpful, but addressing structural problems will be key to improving the country’s economic outlook.”