By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
After nearly two years of interest rates at their highest since 2009, consumers and businesses finally received some relief this week. The Monetary Policy Committee delivered a 25bp interest rate cut, following a fall in inflation to below 4.5% and a 50bp reduction by the Fed. While this was our expectation, many are bound to wonder if a larger cut was not warranted. The South African Reserve Bank's (SARB) latest forecasts appear to validate this view, but do they?
The Fed's 50bp interest rate cut came despite our expectations that their cutting cycle would be more gradual, with rates reduced in increments of 25bps. However, it indicates a shift in focus from inflation to labour market concerns. Interestingly, despite a faster projected fall in interest rates, longer-term rates are slightly higher, with economic growth and inflation steady over the forecast period to 2027. This highlights that longer-term stability in growth and inflation will be accompanied by higher interest rates.
After the cut by the Fed, it is conceivable that many expected a similar magnitude from the SARB. However, the SARB MPC maintained its resolve of cautiousness. While the committee emphasised the upside inflationary risk that geopolitical tensions and administered price growth pose, they also noted a stronger rand and softer oil prices - both of which affect the cost of imported goods, their transport, and use in providing services. These risks could tilt the inflation trajectory further downwards. Therefore, risks to the inflation outlook are considered balanced.
What is more interesting is that despite the anticipated lift in activity, headline inflation is projected to remain below 4.5% over the outlook to 2026. Improved activity would be a combination of more confidence, more stable electricity supply, and the potential spending boost from higher real disposable income and two-pot retirement system withdrawals - which even when allocated to debt reduction, could still support second-round consumption. Therefore, in the MPC's view, demand-driven pressures should remain benign on average, as underlying inflation does most of the heavy lifting in stabilising inflation. This expectation supports a faster fall in interest rates.
The other angle from which to consider this is that, like the US, the stability in SA's macroeconomic dynamics needs to be coupled with higher rates. Therefore, the SARB's forecasts then reflect the impact of higher medium-term interest rates on demand. In line with this, the Quarterly Projection model forecasts rates at 7.86% at the end of this year and just over 7% by the end of 2026 - higher than 6.5% at the end of 2019.
The other angle from which to consider this is that, like the US, the stability in SA's macroeconomic dynamics needs to be coupled with higher rates. Therefore, the SARB's forecasts then reflect the impact of higher medium-term interest rates on demand. In line with this, the Quarterly Projection model forecasts rates at 7.86% at the end of this year and just over 7% by the end of 2026 - higher than 6.5% at the end of 2019.
We can anticipate that the source of inflation risks will be supply-side pressures, and this complicates the communication of central bank decisions and the effectiveness of policy transmission. This should, in general, keep monetary policy steady and gradual. In a nutshell, we are in an interesting phase of macroeconomic policy, where the likelihood of bold policy shifts is low, and expectations of grand policy moves may be met with disappointment.
Week in review
The FNB/BER Consumer Confidence Index continued to improve in 3Q24, rising by seven index points to -5. This marks the highest level in five years, indicating a significant improvement in consumers' willingness to spend. Much of the improvement in sentiment can be ascribed to a marked increase in the household financial outlook sub-index of the CCI (from eight to 14) and a further improvement in the sub-index measuring the appropriateness of the present time to buy durable goods (from -28 to -23). This positive trend is driven by factors such as the formation of a government of national unity, the absence of load-shedding, a stronger rand, lower inflation, and the implementation of the two-pot retirement system.
Across income groups, high-income households have seen the most significant improvement, followed by middle-income households. These households were likely heartened by the deceleration in inflation, coupled with the introduction of the two-pot system and expectations of interest rate cuts, which will boost real disposable income and further support their spending power. This positive outlook bodes well for consumer spending for the remainder of the year, particularly for durable goods consumption. By contrast, sentiment among lower-income households backpedalled in 3Q24. This is likely explained by the fact that less affluent households are less likely to have pension funds and debt tied to the prime interest rate. As such, prospects of interest rate cuts and the implementation of the two-pot retirement system would be less beneficial to low-income consumers. Nevertheless, at -7, sentiment among low-income households does not differ materially to the -6 among high-income, and -4 among middle-income households.
Headline inflation softened further to 4.4% y/y in August, falling below the target midpoint of 4.5% and down from 4.6% in July. Monthly headline inflation was marginal at 0.1%, as minor contributions from food and electricity were offset by fuel deflation. Core inflation also slowed to 4.1% y/y from 4.3% previously, with no monthly pressure. Electricity price inflation increased by 0.2% m/m and 11.5% y/y. Average fuel prices fell by 0.5% m/m and were up by only 1.8% y/y. Food and non-alcoholic beverages inflation lifted slightly to 4.7% y/y from 4.5% in the previous month. Headline inflation could fall below 4.0% in September, as weak domestic demand keeps core inflation contained and falling fuel prices support lower transport costs. Weak global activity, alongside supply pressures, has supported softer oil prices and this has boded well for petroleum prices. Furthermore, the dollar-rand exchange rate has moved even closer to the estimated fair value of R17.50, further alleviating imported price pressures across the board.
Retail sales continued their positive streak in July, recording 2.0% y/y - a fifth consecutive month of expansion. Nevertheless, the outturn undershot Reuters consensus expectations of 3.2% y/y and marks a significant deceleration from the previous month's robust 4.1% y/y growth. On a month-on-month basis, volumes also retreated, declining by a marginal 0.2%, down from a 1.6% expansion in June. All but two categories saw an increase in volumes. The anaemic shopping activity at hardware shops persisted, with volumes sliding by 6.3% y/y, from -0.9% in the previous month. Nevertheless, the 3Q24 FNB/BER Building Confidence Index showed improvements in sales growth among hardware retailers, albeit off an extremely low base, which spurred sentiment to the best level since 2022. This could signal that hardware sales may be close to the bottom, especially when considering the potential impact of the two-pot pension withdrawals and lower interest rates. Supporting the overall sales volumes was a robust 4.4% increase in general dealer activity and a 5.9% increase in pharmaceuticals sales.
Factors contributing to the improved retail sales include the cessation of load-shedding, lower fuel prices, and a post-election boost in sentiment. Looking ahead, lower inflation, reduced borrowing costs, and pension withdrawals could provide further support to consumers. However, despite these positive developments, the overall consumer environment remains challenging. Stretched household budgets, high unemployment, and tight credit conditions continue to limit spending power.
Week ahead
On Tuesday, the leading business cycle indicator for July will be published. In June, the leading business cycle indicator fell slightly by 0.4% m/m to 111.4 index points from 111.9 in May. Five out of the seven available constituent variables decreased, with the largest negative contributions from a decline in residential building plans approved and a narrower interest rate spread. Stable energy supply, easing political uncertainty, slower inflation, and lower interest rates should support economic activity over the near term.
On Thursday, the 3Q24 FNB/BER Civil Confidence Index survey will be published. In 2Q24, the index fell to 44, from a near eight-year peak of 47 points in the previous quarter. This highlighted slowing activity in the sector as well as uncertainty ahead of the elections. Nevertheless, confidence was still above the sample average of 41 points (since 1997), with forward-looking activity indicators showing strong signs of optimism.
On Thursday, producer inflation for August will be released. In July, producer inflation moderated to 4.2% y/y, down from 4.6% y/y in June. Monthly pressure was -0.2%, reflecting a 4.9% and 1.4% monthly decline in petrol and diesel prices, respectively, as well as a 0.1% monthly decline in food products. Excluding petroleum-related products, producer inflation was even lower at 3.7% y/y, down from 4.0%, with food inflation at 3.3% and transport equipment experiencing 0.9% deflation. We expect producer inflation to have moderated further, falling below 4.0% in August, supported by a less depreciated rand, stable oil prices, and statistical base effects.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 17 Sep | SA | FNB BER Consumer Confidence | 3Q24 | -5 | -12 |
| 18 Sep | SA | CPI % m/m | Aug | 0.1 | 0.4 |
| SA | CPI % y/y | Aug | 4.4 | 4.6 | |
| SA | CPI core % m/m | Aug | 0.0 | 0.3 | |
| SA | CPI core % y/y | Aug | 4.1 | 4.3 | |
| SA | Retail sales % m/m | Jul | -0.2 | 1.6 | |
| SA | Retail sales % y/y | Jul | 2.0 | 4.1 | |
| 19 Sep | SA | SARB interest rate announcement | Sep | 8.0 | 8.25 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 25 Sep | SA | Leading Indicator | Jul | -- | 111.4 |
| 27 Sep | SA | FNB/BER Civil Confidence Index | 3Q24 | -- | 44 |
| SA | PPI % m/m | Aug | -0.2 | ||
| SA | PPI % y/y | Aug | 4.2 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 83,760.08 | 2.6% | 0.0% | 11.9% |
| USD/ZAR | 17.50 | -1.5% | -1.7% | -7.2% |
| EUR/ZAR | 19.52 | -0.8% | -1.5% | -2.8% |
| GBP/ZAR | 23.11 | -1.0% | 0.1% | -0.6% |
| Platinum US$/oz. | 988.88 | 1.2% | 4.5% | 6.5% |
| Gold US$/oz. | 2,586.48 | 1.1% | 2.9% | 34.0% |
| Brent US$/oz. | 74.88 | 4.0% | -3.0% | -19.9% |
| SA 10 year bond yield | 9.54 | -2.0% | -5.0% | -16.2% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023 | 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. | 3.75 | 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 |
| * To be reviewed soon | ||||||
