By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
September MPC meeting: Waiting with bated breath
On 19 September, the Monetary Policy Committee (MPC) will host its eighth announcement conference since the last interest rate hike in May 2023. The broad consensus predicts the initiation of a cutting cycle this month. We see a 25bp cut, while some think that there are grounds for a 50bp cut. Nevertheless, a decision to keep rates unchanged will be a hard pill to swallow. A day before the South African Reserve Bank (SARB) makes its announcement, the United States (US) Fed will deliver its decision and the local inflation print for August will be published, which will provide further clues on how weak the starting point for inflation is. Unlike in the US, the labour market and economic growth in SA have not suggested that demand-driven inflation has been a concern for monetary policy. With goods inflation and expectations slowing, countering any ongoing passthrough of earlier price pressures, this is the opportune time to lower interest rates. However, the SARB's Quarterly Projection Model (QPM) Taylor rule, which determines how policy should be adjusted to meet the inflation target, could complicate expectations on the magnitude.
The Fed must contend with an array of indications that the labour market is looser, but demand remains relatively resilient, and the market may be throwing some tantrums. Our expectation is that they will cut reference rates by 25bps to try to avoid compounding already looser financial conditions and exciting the market - who may interpret such a move as the Fed being caught off guard. Fortunately, lower interest rates in other advanced markets have already created space for less restrictive monetary policy in SA.
While more participation in SA bond markets may indicate less pessimism on the policy trajectory, it could also suggest looser funding conditions for fiscal policy. More importantly, it points to a lower risk premium associated with SA assets which, along with a less depreciated trend in the rand, supports a lower in-cycle neutral interest rate.
The last consideration, from a Taylor rule perspective, is inflation. Headline inflation has slowed from 5.6% in February to 4.6% in July, reflecting lower food and fuel prices as well as positive base effects on core goods inflation. In addition, the lift in services inflation in 1Q24 was temporary, and core inflation has been muted. This has suggested that demand-driven inflation has been weak. Furthermore, lower petrol and food prices have assisted with lowering backward-driven surveyed inflation expectations. 3Q24 inflation expectations have fallen by 0.2ppts to around 5% for 2024 and 2025, while 2026 and five-year-ahead expectations have fallen by 0.1ppt to 4.8%. Market expectations have also moved closer to the SARB's target. That said, in 2H25 inflation dynamics should be less supportive, as base effects and global activity support the prices of commodities such as oil. An improvement in local activity will also support services inflation. Therefore, if your Taylor rule, such as that of the SARB, considers three-quarters-ahead inflation, filtered inflation becomes less supportive going into the latter part of 2024. As such, we may not see an extensive cutting cycle. However, if the SARB continues to see inflation stabilising at the end of this year, inflation will firmly join the ranks of economic indicators that do not justify restrictive policy.
The September interest rate announcement is expected to be good news for consumers and small businesses, with only the magnitude in question. The rate decision by the Fed will be a key market-mover, while August local inflation data will be an important precursor to inflation dynamics in 2H24. We predict 25bps and we wait with bated breath.
Week in review
The FNB/BER Building Confidence Index gained five points to reach a level of 40 in 3Q24. All industries along the building value chain recorded improved sentiment, except quantity surveyors and building contractors. Underpinning the better business mood were signs of increased activity and sales across the building value chain. Production of building materials also improved, while production costs eased. The residential building sector continued to underperform in 3Q24, while work for non-residential builders showed a noticeable improvement. Importantly, the building pipeline suggests that there is good cause for optimism regarding the medium-term prospects for the building construction sector. That said, delays in municipal approvals and crime and extortion continue to hinder project rollouts.
Manufacturing output, not seasonally adjusted, increased by 1.7% y/y in July, rebounding from a 5.5% y/y contraction (previously -5.2%) in June. Seasonally adjusted output volumes expanded by 2.1% m/m after a 0.4% decline in June, signalling a positive start to 3Q24. This aligned with the improvement in the PMI business activity index, which rose to 50.8 points from 36.3 in June. Year-to-date (January to July), output remains lower by 0.4% compared to the same period last year, weighed on by weaker production in the automotive, basic iron and steel, and furniture divisions.
Mining production, not seasonally adjusted, unexpectedly contracted by 1.4% y/y in July, following a 3.6% y/y decline in June. Seasonally adjusted mining output also fell by 0.9% m/m, compared to a 1.7% decline in June, signalling sustained weakness into 3Q24. Year-to-date (January to July), mining output is up marginally by 0.2%, compared to a 1.7% decline over the same period last year. Excluding gold, output has risen by 1.4% so far this year.
Week ahead
On Tuesday, the FNB/BER Consumer Confidence Index (CCI) will be published. The CCI continued to improve in 2Q24, lifting to -12 index points, after improving to -15 points in 1Q24 from -17 points in 4Q23. This was the highest reading in 18 months, reflecting a load-shedding reprieve and lower cost-of-living pressures. While the survey was conducted after the national elections, it was before the proposed GNU and was likely still hindered by political uncertainty to some degree. Ultimately, the reading still suggested broad pessimism, highlighting that while consumers perceive their financial outlook as more positive, they remained concerned about the overall performance of the economy, which will hinder their willingness to purchase durable goods.
On Wednesday, data on consumer inflation for August will be released. Headline inflation slowed to 4.6% y/y in July, down from 5.1% in June, despite monthly pressure of 0.4%. Core inflation eased to 4.3% y/y, from 4.5% previously, but also reflected monthly pressure of 0.3%. Electricity price inflation was 11.0% m/m and 12.1% y/y. Average fuel prices fell by 3.6% m/m but were up by 4.5% y/y, down from 7.6% previously. Food and non-alcoholic beverages inflation continued easing to 4.5% y/y from 4.6% previously. We should see subdued monthly pressure on headline inflation in August, as any remaining municipal increases and a potential lift in food price pressures will be countered by fuel deflation. On an annual basis, we see headline inflation remaining steady at 4.6%. Overall, slowing global inflation, softer oil prices, a less depreciated rand, and subdued domestic demand remain supportive to lower inflation this year.
Also on Wednesday, retail sales data for July will be released. In June, volume sales exceeded expectations and surged to 4.1% y/y, from 1.1% in May. On a month-on-month basis, volumes rebounded by 1.6% from the 0.2% decline in May. The recent improvement in retail sales trajectory coincides with load-shedding cessation since March, substantial fuel price cuts, as well as the post-election improvement in sentiment. Nonetheless, the overall consumer environment remains challenging due to high living costs and unemployment, as well as tight credit conditions.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 9 Sep | SA | FNB BER Building Confidence | 3Q24 | 40 | 35 |
| 10 Sep | SA | BER inflation expectations | 3Q24 | 4.9 | 5.0 |
| SA | Manufacturing Production % m/m | Jul | 2.1 | -0.4 | |
| SA | Manufacturing Production % y/y | Jul | 1.7 | -5.5 | |
| 12 Sep | SA | Mining Production % m/m | Jul | -0.9 | -1.7 |
| SA | Mining Production % y/y | Jul | -1.4 | -3.6 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 17 Sep | SA | FNB BER Consumer Confidence | 3Q24 | -- | -12 |
| 18 Sep | SA | CPI % m/m | Aug | -- | 0.4 |
| SA | CPI % y/y | Aug | 4.6 | 4.6 | |
| SA | CPI core % m/m | Aug | -- | 0.3 | |
| SA | CPI core % y/y | Aug | 4.2 | 4.3 | |
| SA | Retail sales % m/m | Jul | -- | 1.6 | |
| SA | Retail sales % y/y | Jul | -- | 4.1 | |
| 19 Sep | SA | Sep | 8.00 | 8.25 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 81,668.39 | -0.6% | 1.4% | 11.4% |
| USD/ZAR | 17.80 | 0.5% | -2.4% | -5.4% |
| EUR/ZAR | 19.77 | 0.3% | -0.9% | -2.1% |
| GBP/ZAR | 23.34 | 0.0% | 0.2% | -0.7% |
| Platinum US$/oz. | 9982.57 | 5.7% | 4.1% | 8.7% |
| Gold US$/oz. | 2,557.90 | 1.6% | 3.4% | 34.1% |
| Brent US$/oz. | 71.97 | -1.0% | -12.6% | -21.7% |
| SA 10 year bond yield | 8.99 | 0.1% | -3.9% | -13.6% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 1.0 | 1.8 | 1.9 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 1.2 | 2.1 | 2.1 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 1.2 | 5.0 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 4.6 | 4.3 | 4.6 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 3.6 | 5.0 | 4.5 |
| Repo rate (year end) %p.a. | 33.75 | 7.00 | 8.25 | 7.75 | 7.50 | 7.50 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.25 | 11.00 | 11.00 |
| USD/ZAR (average) | 14.80 | 16.40 | 18.50 | 18.30 | 17.50 | 18.20 |
