Every time the Federal Reserve adjusts its policy rate, economists inevitably debate whether the South African Reserve Bank (SARB) will follow suit. However, history shows that the alignment between US and South African monetary policy is far from consistent.
Today’s post by Jurgens Fourie shows that since 2000, the correlation between the SARB policy rate and the Fed funds rate has been only 0.37. This indicates that while the SARB does tend to follow the Fed’s lead, it generally does so with a delay.
Ultimately, whether the SARB will mirror an upcoming Fed rate cut depends on how closely South Africa’s growth cycle and capacity pressures match those of the US as these influence the degree to which relative interest rate differentials and exchange rate movements sync up underlying inflationary pressures. It is also worth nothing that unlike the inflation-focused SARB, the Fed’s dual mandate includes supporting maximum employment, making US policy much more sensitive to domestic labor market data.
