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Reserve Bank rate cuts would be a catalyst for SA economic growth

Osagyefo Mazwai
By Osagyefo Mazwai
5 Aug 2024
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Consensus expectations of rate cuts have shifted materially since the release of weaker-than-expected economic data from the US at the end of last week.

The US Federal Open Market Committee (FOMC) met recently and decided to keep interest rates unchanged, a move broadly expected by the market. Interest rate dynamics in the US are among the reasons cited by the South African Reserve Bank (Sarb) when making its interest rate decision last month.

The interest rate trajectory in the US is one of the considerations of Sarb when making monetary policy decisions. The Fed is expected to cut interest rates in September when they conclude their meeting one day before Sarb announces their interest rate decision following Sarb's Monetary Policy Committee (MPC) meeting.

Consensus expectations of rate cuts have shifted materially since the release of weaker-than-expected economic data from the US at the end of last week.

Fed's dual mandate


The Fed is facing a significant balancing task in its attempt to achieve its dual mandate of pursuing maximum employment (through enhancing economic growth) and maintaining price stability in the US. The US continues to battle inflation, with the current level above the central bank target of 2%.

The same is true for its preferred gauge for inflation which is core personal consumption expenditure inflation. Tight monetary policy conditions appear not to have transmitted as aggressively as the hiking cycle would have suggested.

This was primarily driven by the fiscal stimulus in the US supporting savings and preserving/enhancing consumption expenditure despite high interest rates. This was evident in the second-quarter GDP growth, released recently, which showed that the US economy grew at an annualised rate of 2.8%, which signals robust economic growth for 2024 despite high interest rates.

This is perhaps among the reasons why the Fed opted to keep its foot on the brakes as it attempts to induce slower growth which should contain inflation further.

Developed markets have had more difficult conditions than emerging markets in trying to contain inflation. Europe, in particular, has felt the impact of the Eastern European conflict more harshly. Europe’s geopolitical position on Ukraine led to energy challenges (due to their reliance on Russian gas) resulting in high energy prices, with few alternatives at the time. Global food prices also rose due to the role Ukraine plays in the agricultural commodity economy. These two dynamics materially impacted the cost of living in Europe.

Growth in Europe


Recent economic growth outcomes in Europe have been starkly different from those in the US, with high inflation and restrictive monetary policy conditions achieving their intended outcomes. It is perhaps for this reason that the European Central Bank has already started cutting interest rates. The Bank of England is the latest developed market central bank to cut interest rates as the United Kingdom also faces a precarious macroeconomic environment.

As the Fed keeps its foot on the brakes, there are a number of reasons to be concerned about economic growth projections for the US. Weaker-than-expected economic data recently suggests the market is also starting to be concerned.

The International Monetary Fund and consensus forecasts see growth above 2% for 2024, which may be optimistic. Restrictive monetary policy conditions should increasingly become a handbrake on economic activity in the US.

Some anecdotal evidence of this is increasing delinquency rates, particularly in the unsecured lending space such as credit cards. This shows some strain on the part of the US consumer. Concerning high rates, a colleague recently highlighted increasing delinquencies in the commercial mortgage space in the US, reflecting some strain in the system. 

A few months ago, I mentioned in an article on US economic dynamics that the labour market was the key leading indicator of a potential economic slowdown in the US. Following the US FOMC meeting, Fed chair Jerome Powell was quoted as saying: “The downside risks to the employment mandate are real now.”

The normalisation of the labour market, which equates to a situation where the demand and supply of labour are more balanced, implies that job openings should continue to trend down where the opportunity to get employment is diminishing. Job-quits data trending down suggest the same.

Labour market


We have seen a rise in the unemployment rate in the US over the last few months, now sitting at 4.3% (up from 3.7% at the beginning of the year). Increasing unemployment has the effect of reducing consumer demand based on falling consumer confidence as well as less available income for expenditure.

Recent labour market data showed a triggering of the Sahm rule recession indicator, another negative signal for the state of the US economy. In essence, the outlook for the US economy may not be as robust as consensus forecasts suggest, and it is perhaps for this reason that commentary from the US FOMC following their meeting suggests that the interest rate cutting cycle is near so as not to induce a “hard landing” in the US. 

The Minister of Trade, Industry and Competition, Parks Tau, recently attended the African Growth and Opportunity Act (Agoa) forum, at which he mobilised support on Capitol Hill for South Africa to remain party to the Agoa agreement. The significance of the move, other than keeping advantageous tariffs on some of our exports to the US, is the maintenance of price advantages. This should, to some extent, cushion or protect South African exports from the full effects of an economic downturn in the US.

Our best cushion, however, remains the economic structural reform programme. 

Time and again, we have read about the relative impact of secure energy and logistics networks on economic growth going forward. This was captured in Sarb's view that risks to economic growth in South Africa are balanced. That view should change over time and become risks to growth being to the upside.

If Sarb cuts rates, this will be a further catalyst for economic growth in SA. The Bureau for Economic Research captures this in their view that South Africa’s economic growth could be 2.2% in 2025, a sizeable uplift from current projections. DM

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