BOLD 50BPS MOVE BY US FED, WHILE SARB IS MORE CAREFUL WITH A CUT OF 'JUST' 25BPS

This is an extract from the Weekly Review of 20 September 2024. The full Weekly can be found here (for free, but sign up if you want to receive notifications of new editions and other BER publications)

THE WEEK IN PERSPECTIVE by Lisette IJssel de Schepper

This week was all about monetary policy. The biggest global event was the US Federal Reserve (Fed) kicking off its interest rate easing cycle with a bigger-than-initially-expected 50bps cut. Barely six weeks ago Fed chair Jerome Powell said such a move was not on the table. Indeed, some argue the 50bps is an admission by the Fed that it should have started its cutting cycle earlier. Locally, the SA Reserve Bank (SARB) was more prudent, and despite considering a 50bps cut, it opted to lower the repo rate by 25bps.

With the first cut in four years, the SA 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 SARB now assessing the risks to the outlook to be balanced after signalling upside risks in July. The SARB is somewhat more optimistic about economic growth during the second half of the year (with a 1.1% forecast for 2024), but despite a slight upward revision, it still sees medium-term growth below the long-term average. Clients can click here for our comment Ready, set and cut, but the SARB remains careful to trip covering the decision and forecast implications in more detail.  

Other major global central banks also had meetings this week. Before the Fed, Indonesia’s central bank made a surprise cut to its policy rate. This was the first cut in more than three years and not anticipated in advance. The Bank of England (BoE), meanwhile, kept its policy rate unchanged. This was in line with expectations, with the BoE still worried about sticky services inflation.  The central bank said it should be able to cut rates ‘gradually over time’ and is expected to continue its cutting cycle later this year. Turkey also kept its rate unchanged (at a whopping 50%) for a sixth month, despite some gains on the inflation front - to be sure, inflation remains extremely high at around 52% in August and the bank wants to see more improvement before easing policy.

Financial markets were volatile around the Fed decision. The gold price, for example, shot up to a record-high of about $2 600/oz just after the decision but fell back to its recent level of around $2 500/oz when markets digested Powell’s message that 50ps would not be the new pace going forward. Still, global stock markets rallied following the decision with the US S&P 500 closing at a record high on Thursday. The local JSE ALSI was up by 2.6% w-o-w.

Following the outsized Fed cut, the rand exchange rate strengthened to just below R17.40/$ before the SARB decision and remained firm following the announcement. 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 rand can, of course, be volatile. A sustained stronger rand could be one reason for the SARB to cut by more than 25bps in November.

On the economic data front, 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). The uptick in the FNB/BER Consumer Confidence Index in Q3, released earlier this week and available here, was another encouraging sign. The 10-point jump in the CCI over the last 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. 

Meanwhile, the prolonged outage of both generation units at Koeberg nuclear station has resulted in a surge in Eskom’s reported usage of open-cycle gas turbines (OCGTs)—see Figure. When in operation, the units combined generate about 1900MW (or just under two stages of load-shedding…) of power. With more OCGT usage, other unplanned outages being lower than last year, and residual demand being lower, Eskom has managed to avoid load-shedding.