By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
The Monetary Policy Committee (MPC) delivered a 25bps cut at their November meeting yesterday, as expected, and their cautious approach prevails. The South African Reserve Bank (SARB) is now 50bps into the local cutting cycle, while the policy rate is 75bps down in the United States and over 100bps down in the Euro area. While some spectators may have anticipated a 50bps cut, the MPC made it clear that it was not a consideration in their discussions and, like the Fed, the SARB is signalling that it is not in a hurry to neutralise interest rates. A gradual cutting cycle should stabilise upside inflation risks, and the MPC considers the outlook as balanced.
Also as expected, the MPC refrained from commenting on the leadership change in the US, stating instead that the global environment has become more challenging, with the policy space being narrowed by reflation and an uncertain outlook. While some of this uncertainty stems from ongoing geopolitical conflict, a renewed surge in protectionism and government spending remains obvious risks to the outlook. Ultimately, the MPC will keep monitoring the data and policy choices across the globe - remaining data dependent and not affording any forward guidance, especially the kind that would suggest that they are committed to a certain policy path in such fluid conditions.
The MPC's outlook on local growth and inflation remains broadly unchanged, with risks viewed as balanced. While near-term growth could disappoint on mixed high-frequency outcomes, medium-term growth could be stronger with continued structural reform and improved investor sentiment that could reduce the cost of accessing savings. On the inflation front, lower goods inflation is expected to moderate headline inflation over the period to mid-2025, guiding backward-looking inflation expectations downward. The MPC regards near-term inflation to be more anchored than medium-term projections, as higher food and administered costs, as well as normalising services inflation, could drive a sharper turn in headline inflation than currently anticipated. Furthermore, should these risks materialise, they could result in higher wage demands.
Given the pronounced uncertainty embedded in the medium-term outlook for inflation, the MPC ran scenarios that cater for some of the probable shock events. These included higher administered price inflation, a weaker rand, and higher oil prices, which could push inflation above baseline expectations. The MPC also considered a scenario where inflation could be lower than the baseline to potentially include a de-escalation of geopolitical tensions resulting in lower oil prices and a stronger rand. If we could throw another shock event into the SARB's models, it would be a stronger-than-expected normalisation of services inflation given the margin compression experienced over 2022 and 2023.
As has become somewhat of a tradition, the MPC expressed the need for continued reform, ranging from administered prices, network industries, and ensuring sufficient macroeconomic buffers. These reforms are not only key to lowering operational costs and structural inflation, but also reducing South Africa's (SA) vulnerability to external shocks. There is no doubt that SA has sufficient monetary policy space and given the prevailing restrictive stance, the reform-related task for monetary policy going into the outlook will rather include lowering the inflation target. This challenge, among many others, awaits the MPC in the new year. For now, we are 50bps in, cheers to that.
Week in review
The RMB/BER Business Confidence Index (BCI) saw a seven-point boost in 4Q24, climbing to 45 index points from 38 in the previous quarter. This positive trend, marking the third consecutive increase, places the index nearly 20 points above its recent low of 27 reached in 2Q23. The uptick in sentiment is driven by improved business activity and operating conditions compared to 3Q24. Moreover, businesses are optimistic about the upcoming quarter. This level of confidence is the highest since 1Q22 and is marginally above the long-term average of 43 index points. The improvement in the BCI was widespread, with only new vehicle dealers experiencing a decline in confidence. All other sub-sectors reported increased confidence, and three - wholesale, retail, and building contractors - even surpassed the 50-neutral level. Notably, all sectors, except new vehicle dealers, now have confidence readings at or above their long-term averages.
Consumer inflation dipped below the inflation target band in October, posting 2.8% y/y from 3.8% in September. Headline recorded monthly deflation of 0.1%, as marginal contributions from core and food items were outweighed by fuel deflation. Core inflation slowed to 3.9% y/y, from 4.1%, with a monthly increase of 0.2%. Food and non-alcoholic beverages inflation also softened to 3.6% y/y from 4.7%, with monthly pressure of 0.4%. Fuel prices fell by 5.3% m/m and 19.1% y/y. This outcome should be the trough for headline inflation. We see inflation at 3.2% in November and project a steady lift in inflation going into 2025, but not surpassing 4.0%. This trend is supported by positive base effects and contained underlying inflation.
Retail sales growth undershot expectations, and decelerated to 0.9% y/y in September, down from a revised 3.3% in August (revised from 3.2%). On a month-on-month basis, volumes fell by 0.8%, down from a 0.6% increase in August. Nevertheless, average growth over the quarter means that the retail industry will be a boost to GDP growth in 3Q24. Importantly, although this month's print coincides with the introduction of the two-pot retirement system, it does not yet give a complete picture of consumer behaviour, given the administrative lags in settling withdrawals. Year-to-date, retail sales have increased by 1.3% compared to the same period last year, indicating a gradual improvement in the consumer environment, aided by slowing inflation, easing borrowing costs and recovering consumer confidence.
Week ahead
The week will kick off with the FNB/BER Building Confidence Index publication for 4Q24 on Monday. Last quarter, the index improved by five points to reach 40. 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 across the building value chain. In addition, the building pipeline suggested that there is good cause for optimism regarding the medium-term prospects for new work. That said, delays in municipal approvals and crime and extortion continue to hinder project rollouts.
On Tuesday, the business cycle leading indicator for September will be released. In August, the leading indicator declined by 0.7% m/m to 112.8, reflecting declines in seven of its ten components. The most significant negative contributors were slower growth in the real M1 money supply and a drop in export commodity prices. On the positive side, business confidence improved, and approvals for residential building plans increased. However, these gains were insufficient to counterbalance the broader weaknesses. Despite the monthly decline, the leading indicator remained in expansionary territory on an annual basis, rising by 2.4% y/y - an encouraging sign that the broader recovery trend is still intact.
On Thursday, data on producer inflation for October will be released. In September, producer inflation moderated further, falling to 1.0% y/y from 2.8% y/y in August - the lowest level since June 2020. On a monthly basis, producer prices declined by 0.3%, marking the fourth consecutive month of decreases. This reflected steep monthly declines of 5.0% in petrol prices and 4.6% in diesel prices. Excluding petroleum-related products, producer inflation held steady at 2.9% y/y, its lowest since April 2020, though monthly pressure edged up by 0.1%. Two key drivers of the moderation to 1.0% y/y were the sharp annual declines in petrol (-13.2%) and diesel (-15.7%), as well as sustained deflation in transport equipment. The ongoing deflation in fuel prices likely continued to support disinflation in October, with producer inflation potentially nearing 0.0% or even tipping into deflation, though this could signal a cyclical trough.
On Friday, Private Sector Credit Extension (PSCE) data for October will be released. In September, PSCE growth remained relatively strong, albeit at a slightly slower pace of 4.6% compared to the previous month's 4.9%. Corporate credit cooled to 5.6% from 6.3% previously, due to slower uptake of general loans and advances, while corporate mortgages accelerated, indicating a recovery in the commercial real estate market. Household credit remained relatively unchanged, at 3.3%, supported by a significant increase in credit card uptake and robust car finance growth. Overall, when adjusted for inflation, PSCE experienced modest growth of 0.8% in September, suggesting an improving operating environment for both consumers and businesses.
Also on Friday, the trade balance for October will be released. In September, the trade balance recorded a robust surplus of R12.8 billion, up significantly from the revised August surplus of R5.1 billion (previously R5.6 billion). The September surplus was driven by a 3.5% m/m increase in exports to R170.7 billion, while imports declined by 1.3% to R157.9 billion. On a year-to-date basis, the trade surplus has reached R100.4 billion, a notable 66% higher than the R60.4 billion recorded during the same period in 2023. This supports our forecast of a modest current account deficit of around 1.5% of GDP this year.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 20 Nov | SA | RMB/BER Business Confidence Index | 4Q24 | 45.0 | 38.0 |
| SA | CPI % m/m | Oct | -0.1 | 0.1 | |
| SA | CPI % y/y | Oct | 2.8 | 3.8 | |
| SA | Retail Sales % m/m | Sep | -0.8 | 0.6 | |
| SA | Retail Sales % y/y | Sep | 0.9 | 3.3 | |
| 21 Nov | SA | SARB interest rate announcement | Nov | 7.75 | 8.00 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 25 Nov | SA | FNB/BER Building Confidence Index | 4Q24 | -- | 40.0 |
| 26 Nov | SA | Leading Indicator | Sep | -- | 112.8 |
| 28 Nov | SA | PPI % m/m | Oct | -- | -0.3 |
| SA | PPI % y/y | Oct | -- | 1.0 | |
| 29 Nov | SA | Private Sector Credit Extension % y/y | Oct | -- | 4.6 |
| SA | Trade Balance R billion | Oct | -- | 12.8 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 85,522.57 | 2.0% | -1.8% | 15.1% |
| USD/ZAR | 18.11 | -0.9% | 2.8% | -2.9% |
| EUR/ZAR | 18.96 | -1.7% | -0.4% | -6.7% |
| GBP/ZAR | 22.79 | -1.5% | -0.3% | -2.4% |
| Platinum US$/oz. | 964.41 | 2.5% | -4.3% | 2.8% |
| Gold US$/oz. | 2,669.72 | 4.1% | -1.8% | 33.6% |
| Brent US$/barrel | 74.23 | 2.3% | -0.1% | -10.0% |
| SA 10 year bond yield | 9.60 | -1.5% | -4.1% | -10.8% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 1.0 | 1.9 | 1.9 | 2.2 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.4 | 2.3 | 2.1 | 2.4 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -0.8 | 5.4 | 3.9 | 5.3 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.5 | 4.3 | 4.7 | 4.5 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.4 | 5.0 | 4.6 | 4.5 |
| Repo rate (year end) %p.a. | 7.00 | 8.25 | 7.75 | 7.00 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 10.50 | 11.75 | 11.25 | 10.50 | 10.50 | 10.50 |
| USD/ZAR (average) | 16.40 | 18.50 | 18.20 | 17.50 | 18.20 | 18.80 |
