Interest Rate Expectations

The anticipation for interest rates to start declining has been with us for some time now and initially, it was expected that the interest rate cuts would commence around March of this year in most parts of the world.? And for some countries around the world, interest rates have in fact started to drift lower – such as Brazil, the European Central Bank, Canada (the first of the G-7 countries to cut rates) and also more unexpectedly, China quite recently cut their interest rates in an attempt to boost their economy.? Furthermore, there are strong expectations that the Bank of England will also drop their interest rates at their next meeting in August.

So interest rates are decreasing in some areas, but for most parts of the world, the proverbial ‘interest-rate-cut can is simply being kicked further down the road month by month.? As usual, most eyes are fixed on the US Federal Reserve Bank (Fed) for when they intend to cut rates, as this should pave the way, to some extent, for other central banks to follow suit. USA inflation is currently at 3% and although lower than in previous months (and much lower than the 9% of 2 years ago), this is still a far cry from their target inflation of 2%.? We do expect their inflation to tick down in the months to come.? Their next meeting is in September and for this meeting, there is a high probability that they will then cut rates.? The market is generally aligned with this view, although there are strong noises from the Fed itself that it should not cut rates prematurely, only for inflation to flare up again.? Interestingly, from a survey conducted by the Wall Street Journal, 65 out of 67 economists expect the Fed to start cutting rates this calendar year.

The next central bank to keep in mind is the South African Reserve Bank (SARB).? With us being part of the Common Monetary Area (CAM) with the likes of South Africa, their monetary policy has a significant impact on the decisions we make. ?At their previous meeting a week or so ago, they decided to leave their interest rates unchanged for the 7th consecutive time. Inflation is also slightly lower now at 5.1% (June) but still the same as it was in December last year.? So SA’s inflation also remains stubbornly high but there is also an expectation that their inflation should drop in the months to come to around their inflation targeting midpoint of 4.5% in July or August.? This should provide enough impetus for the SARB to cut rates at their meeting on 19 September, especially if the Fed also decided to cut their rate at their meeting one day earlier.

For us here in Namibia, the Bank of Namibia’s (BoN) next interest rate meetings are in mid-August and then again in late October.? Our inflation is also coming down nicely and is currently at 4.6% (June) however, that may not be enough to convince our central bank to cut rates as early as August.? We reckon the chances are good for our first interest rate cut of 0.25% to realise at the October meeting, followed by another similar cut in December and then another 0.75% in the first half of 2025.

This outlook should provide some welcome relief for many households and businesses alike.