By: Harry Scherzer, CEO, FutureForex
On Thursday this week, the Reserve Bank is likely to cut interest rates for the first time since the height of the Covid-19 pandemic. The anticipated decrease, which will come as welcome news to heavily-indebted consumers, follows a series of increases designed to curb inflation and which resulted in the repo rate hitting a 15-year high of 8.25% in May last year.
As welcome as a rate cut will be to anyone paying off a home, car, or student loan and to those with credit card or store debt, it has other implications too. At least some of these implications will impact individuals and businesses moving large sums of money internationally.
With the right strategies in place, however, they can take full advantage of any positive impacts of a rate cut while also mitigating any negative effects. One of the most important actions any person or business can take on this front is to ensure that they use the right international money transfer provider.
The impact of interest rate cuts on currency exchange rates
Before considering why choosing the right provider is so important, it’s worth understanding how interest rates can impact currency exchange rates.
For instance, an interest rate cut could weaken the rand as investor money flows out of government bonds. That’s not specific to the rand either. The US dollar has already weakened off the back of speculation around an interest rate cut. While that’s benefited South African consumers, particularly at the petrol pumps, it will be interesting to see what impact rate cuts from both countries have on the exchange rate between their two currencies.
As interest rates fall in South Africa and around the world, the economy could also be positively affected. If, as increasingly seems likely, central banks have managed to stabilise inflation while avoiding a global recession, then they may well be more inclined to keep cutting them. If that’s the case, investors will likely turn away from the relative safety of government bonds and towards riskier asset classes in the quest for higher yield.
That, in turn, could result in those investors backing South African technology startups, infrastructure projects and other asset classes, boosting the economy. The economy could also benefit from increased consumer spending as servicing debt becomes more affordable. If significant economic growth is the result, then the rand could strengthen further.
Use the right provider
For anyone wanting to move significant amounts of money abroad, these potential exchange rate shifts, in either direction, can cause a fair bit of uncertainty. You could, for example, hope that the rand continues to strengthen only for it to experience a dramatic fall on the day you decide to transfer your money.
Fortunately, this uncertainty can be mitigated by choosing the right international money transfer provider. Contrary to most people’s first instincts, that provider is unlikely to be their bank.
Almost all South African banks don’t price international money transfers transparently, meaning that people and businesses end up paying far more than they realise on each transaction, regardless of the value of the rand. Banks also tend to fall short on customer service, especially when it comes to helping customers with BoP codes and any Sars or Reserve Bank clearances they might need.
This, in turn, can result in transactions taking far longer than they should. This only serves to add further uncertainty to what is an extremely dynamic transaction. You can safely avoid any uncertainty by using an alternative provider that prioritises transparency and differentiates itself through expert-led customer experience.
Businesses can give themselves further certainty by using a provider offering forward exchange cover (FEC). FEC is a tool used to manage the risk of fluctuations in exchange rates. Simply put, the company making an international payment enters into a contract with the payment provider to exchange a specified amount of one currency for another at a specified exchange rate on a future date. So, regardless of the currency fluctuations in between, the company knows exactly how much it’ll pay for that transaction, providing much-needed certainty.
Move money with confidence, no matter what the exchange rate
Ultimately, the anticipated interest rate cut will impact the rand, particularly in the short and medium terms. But it’s just one of a plethora of factors that impact the value of the local currency.
So, while these economic markers are worth paying attention to, they shouldn’t hinder how confident you feel about making an international money transfer. By using the right provider, you can feel confident knowing that you’re moving your money in the best possible way, regardless of what factors are impacting the exchange rate at that point in time.
* Scherzer is the CEO of FutureForex.
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