By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
No interest rate change, no surprise
The Monetary Policy Committee (MPC) kept interest rates unchanged at their July meeting this week, which came as no surprise. The broad analyst expectation was in line with this decision, with money market participants pricing in a low probability of a cut. The MPC lowered their inflation forecast and delivered a dovish tone, suggesting that at least one of the last two meetings of the year should involve an interest rate cut. For now, only two out of the six members voted for a cut.
The MPC mainly made marked-to-market changes to their forecasts. Following the disappointing 1Q24 GDP data, and early indications of weak 2Q24 outcomes, the MPC shaved its annual growth projection to 1.1% from 1.2% previously. Nevertheless, more stable electricity supply still supports improved trends, and the weakness should mainly affect 1H24 growth. Furthermore, the lower base provides some impetus to the 2025 and 2026 predictions.
The inflation forecast reflects a slightly more material change, with a downward revision from 5.1% to 4.9% for 2024 and 4.5% to 4.4% for 2025. This is on lower fuel and food price inflation, which should be driven by a less depreciated rand. Since the MPC has shifted more of the downside risk into the baseline, risks are now tilted upwards. This upside risk includes adverse weather conditions, as we have recently noted with the freezing conditions in Limpopo and flooding in the Western Cape that has affected fresh produce. In addition, geopolitical tensions and nationalist political leanings could limit the flow of commodities and goods, weigh on riskier market currencies, and exert upward pressure on inflation. Another important factor is that surveyed inflation expectations remain above the 4.5% target, however, the gap has narrowed in the latest outcomes.
As headline inflation slows, temporarily falling below target in some months in 2H24, this should support lower inflation expectations. However, lower administered prices, tighter fiscal policy, and higher productivity growth would also be conducive to lower structural inflation. In its latest forecast report, the IMF warns that the rate of disinflation should slow, therefore, the road ahead should be bumpy, keeping monetary policy on high alert.
Following dovish remarks by the Fed, the market is lifting the probability of two cuts in the US, with the first being in September. However, the Fed and the IMF are more prudent, with only one cut projected for this year and a higher probability of more cuts next year. Nevertheless, an expected Fed cut on 18 September should usher in a SARB cut without compromising the currency outlook. That means a September SARB cut is highly probable, however, should the SARB choose to take some time to assess food inflation and currency moves, a cut in November would be a more likely scenario.
Ultimately, we believe a cut will be delivered before the end of this year, affording constrained households and businesses much-needed relief. However, we maintain that borrowing costs are likely to remain above pre-pandemic levels for some time. This makes managing debt and discretionary spending a potentially long and difficult process for households and governments in the coming years.
Week in review
Retail sales in May came in slightly higher than expected, growing 0.8% y/y compared to 0.7% in April. Reuters consensus expectations were for a 0.7% increase. The improvement was broad-based across six out seven retailers, largely driven by spending at general dealers (1.7% y/y), food and beverage stores (4.4%), and furniture shops (6.2%). However, clothing and footwear retailers saw a decline in sales volume, recording -4.5%. Seasonally adjusted sales declined by 0.7% compared to the previous month, partly reversing the 1.3% gain in April. Nevertheless, the retail industry is still contributing positively to the economy in the second quarter of 2024. That said, consumer spending should remain relatively subdued given the persistently high costs of living and low consumer sentiment.
Week ahead
On Tuesday, the leading business cycle indicator for May will be released. The leading indicator recorded 113.0 index points in April, suggesting a 2.4% m/m and 1.8% y/y increase. This reflected broad-based improvement as eight out of the ten constituent variables increased. This was the first positive annual reading in two years and could be an early indication of improving economic outcomes – should reforms continue to progress.
On Wednesday, data on consumer inflation for June will be released. Headline inflation steadied at 5.2% y/y in May, with moderate monthly pressure of 0.2%. Core inflation also remained flat at 4.6% y/y and had monthly pressure of 0.1%. We should see headline inflation continue its plateau in June, recording 0.1% m/m and 5.2% y/y. Monthly pressure should remain subdued, as higher core inflation, supported by new data on housing price pressures, is mitigated by fuel deflation. Food pressures should intensify in 2H24 as the impact of adverse weather conditions and higher soft commodity prices reaches retail shelves. In addition, utility inflation should compound inflationary pressures. Nevertheless, slowing global inflation, range-bound oil prices, a less depreciated rand, and subdued domestic demand should support slowing inflation going into 2025. In line with this, headline inflation should average 5% this year, before slowing closer to the 4.5% midpoint over the forecast period.
On Thursday, data on producer inflation for June will be released. Producer inflation slowed to 4.6% in May, from 5.1% y/y in April, with petroleum-related products remaining especially elevated. Monthly pressure was 0.1%, down from 0.5%, pulled lower by a 4.5% m/m decline in transport equipment prices. Lower fuel prices in June should support the continuation of softer producer inflation after the post-pandemic uplift.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 17 Jul | SA | Retail sales % m/m | May | -0.7 | 0.5 |
| SA | Retail sales % y/y | May | 0.8 | 0.7 | |
| 18 Jul | SA | SARB interest rate announcement | Jul | 8.25 | 8.25 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 23 Jul | SA | Leading business cycle indicator | May | -- | 113.0 |
| 24 Jul | SA | CPI % m/m | MJun | 0.0 | 0.2 |
| SA | CPI % y/y | Jun | 5.1 | 5.2 | |
| 25 Jul | SA | PPI % m/m | Jun | -0.3 | 0.1 |
| SA | PPI % y/y | Jun | 4.5 | 4.6 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 80,334.26 | -0.9% | 0.7% | 4.2% |
| USD/ZAR | 18.26 | 1.4%% | 1.2% | 2.2% |
| EUR/ZAR | 19.90 | 1.7% | 2.7% | -0.6% |
| GBP/ZAR | 23.64 | 1.7% | 3.1% | 2.3% |
| Platinum US$/oz. | 972.08 | -3.5% | -0.5% | -0.4% |
| Gold US$/oz. | 2,445.08 | 1.2% | 5.0% | 23.7% |
| Brent US$/oz. | 85.11 | -0.3% | -0.3% | 7.1% |
| SA 10 year bond yield | 10.33 | 0.4% | -3.2% | -5.4% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 0.9 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 0.9 | 1.6 | 1.8 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 1.1 | 5.0 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.0 | 4.7 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.6 | 4.7 | 4.7 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 8.00 | 7.50 | 7.50 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.50 | 11.00 | 11.00 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.30 | 17.50 | 18.30 |
