All eyes will be on Central Bank policy interest rate decisions this week as the US Federal Reserve’s anticipated rate cut takes center stage. Locally, the South African Reserve Bank’s (SARB) MPC is expected to cut the repo rate for the first time since the repo rate was hiked to 8.25% in May 2023.
International Market Developments
The US Federal Reserve’s Federal Open Market Committee (FOMC) meeting on Wednesday is highly anticipated. Markets widely expect the Fed to initiate a rate-cutting cycle, with a 25 basis points (bps) cut anticipated. This move is supported by recent economic data showing a deceleration in inflation towards the Fed’s 2% targe. CPI inflation slowed to 2.5% year-over-year (y/y) in August, down from 2.9% y/y in July. Monthly CPI inflation remained stable at 0.2% in August. Core inflation saw a slight monthly increase, driven primarily by rising housing costs, but held steady at 3.2% y/y. In addition, mixed signals from the labor market further reinforce the case for a modest reduction in interest rates.
US Treasury Secretary Janet Yellen has addressed concerns over the US economy’s slowdown, presenting a positive outlook. Although the jobs market has cooled, Yellen emphasized that the economy is deep into a recovery, operating at full employment. She indicated that there are no immediate warning signs and that a “soft landing” remains the most probable scenario.
The International Energy Agency (IEA) released its latest oil market report, highlighting that global oil demand growth is rapidly decelerating, reaching its lowest rate since the pandemic. Contributing factors include a cooling Chinese economy and the swift rise in electric vehicle adoption worldwide.
Local Market Developments
Surveyed inflation expectations have continued to decline, with expectations for this year averaging 5.1%, down from 5.3% in Q2:24. Longer-term expectations have also decreased, indicating a more favorable inflation outlook. The CPI print for August, due out on Wednesday, is expected at 4.5% y/y, in line with the midpoint of the South African Reserve Bank’s (SARB) inflation target band.
The favorable inflation outlook supports the expectation that the SARB will proceed with a 25bps repo rate cut next week to 8%, which will provide much needed relief for South African consumers. Markets are pricing in a total of 1.25% in total rate cuts over the next 12 months.