Although the inflation rate surprised economists this week, the Reserve Bank did not and kept the repo rate unchanged.
This past week, all eyes were on the central banks to see if they would adjust the repo rate or interest rates, or if they would keep them unchanged. In a surprise move, the South African Reserve Bank kept the repo rate unchanged, although the United States (US) Federal Reserve (Fed) cut interest rates in the US by 25 basis points.
Bianca Botes, director at Citadel Global, had a look at commodity markets and says crude markets steadied, with Brent trading near $67.50/barrel after trimming earlier gains. “The move came as comments from US President Donald Trump reignited pressure for cheaper energy, dampening supply fears that lifted prices earlier in the week.
“Trump signalled a preference for lower oil costs rather than escalating sanctions to squeeze Russia, easing concerns over further disruption to global flows. This helped offset the impact of recent Ukrainian attacks on Russian infrastructure.”
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Gold slipped back after record as safe haven
She says gold slipped back to around $3,630/ounce after hitting fresh highs earlier this week and setting up its first weekly decline in a month, although it was marginal. “The Fed’s policy shift, its first since December, left room for further easing, but policymakers warned inflation pressures could slow the pace of cuts.
Powell underscored that the adjustment was a cautious response to labour market cooling, not the start of an aggressive cycle. “Even so, gold gained nearly 39% year-to-date, bolstered by geopolitical stress and sustained central bank buying.”
Busisiwe Nkonki and Isaac Matshego, economists at the Nedbank Group Economic Unit, agree that the Brent Crude Oil price was driven by heightened supply concerns and geopolitical tensions. “Ukrainian drone attacks on key Russian energy infrastructure, including export terminals and refineries, raised fears of disruptions in global supply.”
They say gold hovered near its record high, extending its weekly gains on Fed easing and strong safe-haven demand.
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Rand steady against US dollar at R17,37/$
Nkonki and Matshego say the rand held relatively steady, drifting towards firmer ground over the week. “Interest rate differentials shored up the rand, with the South African Reserve Bank (Sarb) holding its policy rate unchanged, while the US Fed resumed its rate-cutting cycle after a prolonged pause. Renewed foreign interest in the local bond market provided further support.”
Botes also noted that the rand traded near R17.40/$, down from the strongest levels of the year witnessed earlier this week, pressured by a firmer dollar and softer metal prices. The rand was trading at R17.37/$ this afternoon.
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SA’s repo rate unchanged at 7%, but the US Fed cuts by 25 basis points
Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says the week was all about monetary policy decisions by the global and South African central banks.
“The decisions were largely in line with market expectations. At home, the South African Reserve Bank (Sarb) kept its repo rate unchanged, after a softer August inflation print and a welcome dip in inflation expectations for the third quarter.
“Still, expectations remain above the Sarb’s preferred 3% target, and the Sarb likely wants more progress before cutting. Abroad, the US Fed delivered a widely anticipated 25 basis points cut but packaged it as a “hawkish” move, stressing that future decisions will be data dependent.
Nkonki and Matshego say the Monetary Policy Committee (MPC) decided to pause to assess the impact of earlier rate cuts on the economy and see how inflation risks and expectations evolve in the months ahead. The Sarb raised its inflation forecasts slightly, reflecting a modestly higher peak around year-end.
“The MPC believes structural reforms will drive the recovery, with support from cyclical tailwinds. They considered the risks to both the inflation and growth outlooks as balanced. The Sarb’s Quarterly Projection Model pointed to another 25 basis points cut this year, followed by reductions of a further 50 to 75 basis points next year.
Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say they think the drop in the inflation rate surprised the Sarb as much as the economists.
“Ultimately, the Sarb thinks that the disinflation process embedded in its forecast is not reliant on ambitious assumptions on inflation expectations. Instead, softer import costs and restrictive monetary policy should keep inflationary pressures contained.
“However, the Sarb continues to express the importance of government being on board and slower administered price adjustments assisting with guiding expectations lower.”
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Inflation for August surprises economists
Statistics SA announced this week that the inflation rate for August dipped by 0.2% to 3.3% after economists expected that it would increase rather than decrease.
Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano see headline inflation lifting slightly to 0.2% month-on-month and 3.4% year-on-year in September. “There will be some core inflation pressures, as new housing inflation data becomes available, while average fuel prices continue to detract from monthly headline pressures. Fading positive base effects should support inflation, almost touching 4% in the last quarter of this year.”
Nadia Matulich, economist at the BER, points out that the BER’s inflation expectations survey released on Monday also showed that expectations fell across all groups. “On average, expectations for the next five years were down to 4.2% (from 4.4%), the lowest on record since 2011.”
Nkonki and Matshego say the Sarb’s decision followed some good news on the inflation front, with inflation moderating from 3.5% in July to 3.3% in August, contained by slowing food prices and continued declines in fuel prices.
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Retail trade sales boosted by motor trade sales
According to Statistics SA, retail trade sales increased by 5.6%, accelerating from 1.7% in June. Gains were broad-based, with textiles, clothing, footwear and leather goods up 10%. Motor trade sales increased by 3%, with new and used vehicle sales strong. However, wholesale trade sales fell by 0.3% in July from 1.0% in June.
Nkonki and Matshego say they think the upward momentum is likely to continue, underpinned by rising real incomes, subdued inflation, ongoing withdrawals of contractual savings and lower debt service costs compared to last year.
Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say the strength in retail, particularly in non-essential categories, reflects improving household purchasing power and balance sheets, as well as a less restrictive monetary policy.
