Weekly economic wrap: All about monetary policy

This week was all about monetary policy, with the Reserve Bank opting for a conservative 25 basis points cut.

This was while the US Federal Reserve chose to cut US interest rates by 50 basis points, six weeks ago Fed chair Jerome Powell said such a move was not on the table.

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says with the first cut in four years, the South African repo rate will go down to 8% and the prime rate to 11.5%.

“The decision to lower the policy rate was supported by an improved inflation outlook, with the South African Reserve Bank (Sarb) now assessing the risks to the outlook to be balanced after signalling upside risks in July.

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say after nearly two years of interest rates at their highest since 2009, consumers and businesses finally received some relief this week.

“While this was our expectation, many are bound to wonder if a larger cut was not warranted. The Sarb’s latest forecasts appear to validate this view, but do they?”

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say the repo rate cut reflects the Sarb’s expectations of sustainably lower inflation over the medium term. “Although elevated inflation expectations remain a concern, the Sarb stated that it is moving in the right direction, adding that it anticipates further progress as headline inflation stabilises at lower levels.”

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Inflation drops to 4.4% and supports monetary policy decision

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say 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.”

Matshego and Nkonki say the downward pressure on inflation primarily stemmed from the continued moderation in transport inflation. Lower housing and utilities prices also contributed, but food and non-alcoholic beverages increased slightly.

“We expect headline inflation to remain below the mid-point of the Sarb’s target range throughout the remainder of the year, ending 2024 at around 4%. Most of the downward pressure will still emanate from easing fuel prices. The Brent crude oil price will be contained by subdued global demand and ample supply.

“The upside on inflation will mainly emanate from food, which is expected to increase as the base reverses. Even so, food inflation will be partly mitigated by global disinflation and favourable climatic conditions.”

ALSO READ: Inflation outlook improved in recent months – good news for repo rate cut

Domestic retail trade

On the economic data front, IJssel de Schepper points out that domestic trade figures showed retail and wholesale trade slipping slightly in the first month of the third quarter. “Coupled with the implementation of the two-pot retirement system, the slight easing of the local monetary policy stance is likely to take some pressure off the struggling consumer during the final months of 2024, especially if the SARB follows through with another cut in November.”

Matshego and Nkonki the growth of retail sales was stronger than their forecast of 1.5%. “We are seeing modest upward momentum emerging, hinting that retail trade sales may be turning the corner, probably supported by lower prices and rising real incomes. As inflation recedes further and income recovers, retail sales should gather momentum.”

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano Retail sales continued their positive streak in July, recording 2.0%, the fifth consecutive month of expansion. “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.”

ALSO READ: Consumer confidence at five-year high, but still below average

Consumer Confidence Index for the third quarter

IJssel de Schepper says the uptick in the FNB/BER Consumer Confidence Index was another encouraging sign. “The 10-point jump in the index over the past six months (and 20-point increase since mid-2023) signals a pronounced improvement in consumers’ willingness to spend and bodes well for the outlook for consumer spending for the remainder of the year.”

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say the index’s highest level in five years indicates 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 index 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).

ALSO READ: Weekly economic wrap: manufacturing and inflation expectations

The rand strengthened some more due to easing monetary policy

Bianca Botes, director at Citadel Global, the rand strengthening marked a significant recovery as the currency was buoyed by the US dollar’s pullback and South Africa’s first interest rate cut in four years. “Amid the 25 basis point reduction by the Sarb, combined with renewed investor sentiment, the rand reached its strongest level since February 2023.

After the outsized Fed interest rate cut, the rand exchange rate strengthened to just below R17.40/$ before the Sarb decision and remained firm following the announcement, IJssel de Schepper, points out.

“Indeed, it is perhaps worth noting that the Sarb’s assumed starting point (R18.04/$) of its forecast is significantly weaker than the level it was trading at the time of the statement, but the Rend can, of course, be volatile. A sustained stronger rand could be one reason for the Sarb to cut by more than 25 basis points in November.”

Matshego and Nkonki say that compared to the previous week, the rand gained by 1%. “The rand has been resilient against a weaker US dollar, bolstered by expectations for a US Fed rate cut and reduced political uncertainty following the formation of a Government of National Unity.

“These factors will continue supporting the local unit in the coming months.”