Fed easing, SARB holding — a policy gap that could give the rand real lift

Executive Summary:
• Fed: Likely to cut rates on 17 Sept (25bp baseline; 50bp possible). Focus has shifted from inflation to slowing growth and labour market weakness.
• SARB: Expected to hold rates on 18 Sept, reflecting its effective 3% inflation target. No cuts likely before 2027, but also no hikes.
• Implications: Diverging policy paths — Fed easing vs SARB on hold — should lend support to the rand, with upside potential if the Fed surprises with a larger cut.

Interest Rate Outlook: Fed vs SARB

Upcoming meetings
• Federal Reserve (FOMC): Wednesday, 17 September
• South African Reserve Bank (MPC): Thursday, 18 September

United States:

The Federal Reserve’s focus has shifted toward supporting the real economy. Inflation remains above the 2% target and somewhat sticky, but the labour market has slowed markedly in recent months. While employment is still growing, the pace has moderated significantly since the start of the year, pointing to potential weakness in household incomes and spending ahead.

The Conference Board’s leading indicator has been declining for over 40 months, underscoring downside growth risks. Policy uncertainty is also weighing on business and consumer confidence. These dynamics will temper tariff-related price pressures and create room for monetary easing.

At the July FOMC meeting, two members already voted for a cut. I expect the Fed to deliver a 25bp rate cut next week, followed by a series of similar cuts over the next 4–5 meetings. However, there is a material probability — close to 50% — of a 50bp move at this meeting. While such a cut would not be a major surprise, a 75bp or 100bp cut would shock markets and trigger a sharp USD reaction.

South Africa:

Domestic inflationary conditions have improved modestly since the July MPC meeting, although the overall economy remains weak. Q2 GDP growth was firmer than Q1, but first-half growth was still subdued.

Under a 4.5% midpoint inflation target, this environment might have supported a cut. However, the SARB’s current de-facto focus on the lower bound of its 3–6% range (3%) effectively rules this out.

I therefore expect the MPC to keep rates unchanged next week — and likely through to 2027, when a new cutting cycle may begin. Importantly, this stance should also mean no hikes over the period.

Some market participants are pricing in a cut next week, but this looks unlikely. In addition, the SARB’s inflation assumptions have been on the optimistic side — for example, they will need to adjust for NERSA’s recent upward revision of electricity tariffs.

The result of these moves should see the rand exchange rate gaining some ground – perhaps a lot of ground, depending on the size of the US rate cut.

Summary:
• Fed: Rate cut expected (25bp baseline; risk of 50bp surprise).
• SARB: Rates unchanged.
• FX implications: A Fed cut should provide support for the rand, with the extent of gains depending on the size of the U.S. move.