September was an eventful month for central banks. The long-awaited rate-cutting cycle finally got underway in the US, but back home, the South African Reserve Bank (SARB) surprised markets by holding rates steady. These diverging paths tell us a lot about the economic dynamics driving these economies. They also hint at the differing degrees of independence enjoyed by the two central banks, with the US Federal Reserve (Fed) under intense political pressure to reduce rates at a faster pace and the SARB steadfast in its independence.
Fed delivers as expected, SARB springs a surprise
The Fed did exactly as markets expected, announcing a 25-basis-point cut, lowering rates to between 4.00 and 4.25%. It’s the first cut since December, and chair Jerome Powell made it clear they remain concerned about the labour market. Unemployment is gradually rising, and the average US working week is shrinking, all signs that the US economy is becoming a bit wobbly. The Fed anticipates two more cuts before the year ends, which would bring rates down to around 3.50 to 3.75%.
In contrast, the SARB completely wrong-footed the markets by keeping rates at 7%. This was a real curveball for traders, who had been betting on a 60% chance of a cut after inflation unexpectedly dropped to 3.3% in August. The decision wasn’t unanimous either, with the committee split 4 – 2. Governor Lesetja Kganyago’s reasoning was that they want to see how the 125 basis points’ worth of cumulative cuts since last September are working their way through the economy. He’s also cautious in the face of potentially upward pressure on food, electricity and services inflation.
Market reactions tell the story
Wall Street reacted positively to the Fed’s decision, with equity markets reaching new all-time highs. Tech stocks, in particular, gained from the prospect of lower interest rates, as declining borrowing costs make future earnings more appealing. Growth stocks continued their winning streak as investors welcomed the idea of ongoing monetary support.
Over here, the SARB’s surprise pause helped the rand, which firmed slightly to R17.35 per dollar. Bond yields also fell as investors recalibrated their expectations for a slower cutting cycle. Market expectations for a November cut declined 20 basis points to just 13 basis points after the announcement.
What this means going forward
The Fed’s pledge to implement more rate cuts should sustain the good times for global stocks. This typically means more investment flowing into emerging markets like ours. However, it all hinges on whether these rate reductions are due to a “soft landing” or because the Fed has acted earlier than usual in response to political pressure.
For South African markets, the SARB’s cautious approach might actually be the smarter strategy in the long term. By not rushing to cut rates, the SARB keeps its powder dry for navigating external shocks, like potential trade disruptions from US tariffs.
The bottom line
Although the SARB’s more measured approach might disappoint some traders in the short term, it is probably a wise call at a time when global macroeconomic and geopolitical conditions are highly precarious and unpredictable.
If you have any questions about how all of this affects your investment portfolio, please give us a ring.
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