Weekly economic wrap: inflation and the rand in the spotlight

The inflation rate for July which fell by 0.5% to 4/6% and the rand trading below the psychological barrier of R18 this week brought hope for consumers that the South African Reserve Bank will at last cut the repo rate after two years.

Bianca Botes, director at Citadel Global also points out that the Johannesburg Stock Exchange reached record highs, driven by global market sentiment and expectations of Fed rate cuts. Among individual stocks, cloud company, Karooooo, renewable energy firm, Montauk Renewables and investment and development company, Shaftesbury Capital, were notable gainers.

“The rand traded just below the R18.00/$ mark on the back of profit-taking, following the recent robust rally on the back of expectations of a repo rate cut by the South African Reserve Bank (Sarb) in September, improving the outlook for consumers and households in South Africa.”

ALSO READ: Inflation decrease: All signs now point to repo rate cut

Stronger rand, lower inflation

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says In financial markets, the rand exchange rate remained fairly strong through most of this week. “Up to late on Wednesday, the rand exchange rate remained comfortably below R18/$, before losing some ground on Thursday.

“While a somewhat weaker dollar played a role in keeping the rand stronger, sentiment towards South Africa is also more positive with the credit default swap (CDS) spread below 200 through last week.”

De Schepper says the biggest domestic development this week was the July consumer inflation print, with headline and core inflation (which excludes energy and food prices) coming in below the BER’s and the consensus forecasts.

Brent crude oil also traded below $80/barrel, which bodes well for the near-term inflation outlook. Internationally, minutes from the July US Federal Reserve (Fed) meeting provided firm guidance that an interest rate cut is on the table for September.

“A member of the Sarb’s Monetary Policy Committee (MPC) would probably tell you that a lower historic inflation print does not determine forward-looking interest rate decisions and therefore this week’s data is not that important.

“But of course, a lower starting point matters. The fact that the electricity component of CPI was somewhat lower than Sarb’s latest forecast should help with a lower inflation profile going forward as this price increase will largely determine the annual rate of change until the next survey of electricity prices.”

ALSO READ: Inflation dips below 5% in July for the first time in 3 years

Lower inflation supports repo rate cut in September

She says the July inflation print reinforces the BER’s long-held view that the Sarb will cut the repo rate in September. “The magnitude of the cut will depend on inflation expectations, while the Sarb will for sure “watch” the Fed decision to be announced the day before its own meeting.

“Frontloading the easing by 50 basis points (instead of our current baseline of 25 basis points) in September would not be unwarranted, but for now, it is still difficult to tell a story of significantly more easing.” 

 Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, agree that the inflation rate for July was the important announcement of the economic week.

“Slowing global inflation, stable oil prices, a less depreciated rand and subdued domestic demand remain supportive to lower inflation this year. We anticipate that inflation will fall below the 4.5% target over the next few quarters but lift at the turn of next year as base effects become less favourable.”

ALSO READ: July also better month for salaries in SA

Economists waiting for the Federal Reserve to take the lead

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say the rand came under pressure as markets assess a slew of US economic data and await Federal Reserve (Fed) Chair Jerome Powell’s opening remarks at Jackson Hole today for further hints on the path of US monetary policy.

“However, losses were partially contained by a weaker dollar after the Fed’s July meeting minutes somewhat validated expectations for a September rate cut. The British pound strengthened after robust Purchasing Managers Index (PMI) data pointed to a further improvement in UK economic activity. The Japanese yen rebounded after dipping over ¥147 to the dollar last week.”

They say the faster moderation in inflation is encouraging as it will ease the strain on household disposable income. “We now expect inflation to fall below the 4.5% Sarb target in September (from October previously) and average 4.8% for the year from 4.9%.

“The downward trend will primarily come from fuel and food prices. We believe that the lower inflation trajectory and the start of the cutting cycle in the major economies will prompt the Sarb to start reducing interest rates by 25 basis points in September, followed by another cut of the same margin in November, taking the prime rate to 11.25 by the end of 2024. More cuts totalling 75 basis points will follow in 2025, taking the prime rate to 10.50 at the end of the year.”