US Rate Hike Threatens Rand Advantage for South African Investors

South African investors are on notice following the US Federal Reserve's interest rate hike. The increase of 0.25% is the first since 2023, and it's aimed at tackling inflation that remains too high.

The story feels familiar as we've been here before. During Covid, central banks around the world cut interest rates to support households and businesses. In the US, rates went to almost zero, while in South Africa, the repo rate fell to a record low of 3.5%.

This worked, but perhaps too well. As economies reopened, spending surged while supply chains were still broken, leading to inflation peaking above 9% in the US and almost 8% here in 2022. Central banks responded with the fastest rate hikes in decades, pushing US rates above 5% and our repo rate to 8.25% by 2023.

The impact was felt by many in their home loan repayments. Eventually, this strategy worked, and inflation came down. In September 2024, both the US and South Africa started cutting rates, giving a sense of relief that the worst was behind us.

However, the story has taken a new turn with oil prices jumping, leading to renewed pressure on inflation. This is especially concerning for South Africa, where our inflation rose to 5% in June before easing to 4.3% in July. The Reserve Bank already raised rates in May, and another hike next Wednesday is a real possibility.

The implications for South African investors are less obvious but no less significant. With the US targeting an inflation rate of 2%, while we aim for 3%, the gap between our inflation levels is now much smaller than before.

This reduction in the inflation gap means there's less pressure on the rand to weaken, which had previously given offshore investments a boost when converted back into rands. While this doesn't make offshore investing any less important, it does mean that offshore returns may increasingly need to stand on their own rather than relying on the rand.