Last week, US inflation data suggested that inflation is a lot stickier than anticipated, reducing the likelihood of interest rates cuts in the near term. Fears of the tension between Israel and Iran escalating in the Middle East persist. Locally, CPI inflation for March eased following two months of up-swings, but upside risks to the inflation outlook remain.
International Market Developments
Global market sentiment last week was once again dominated by US policy rate expectations with financial markets reconsidering the likelihood of imminent rate cuts given the hotter-than-expected US CPI inflation print last Wednesday. Fed speakers have also elevated their tune, with considerably more hawkish comments than those previously noted. The Fed is concerned that recent inflation data has remained stickier than previously expected, which, in turn, has reduced confidence that inflation is on a sustained downward trend. The Fed appears to be in no rush to ease policy.
We continue to monitor risks to South African-US relations, with both countries heading to the polls this year, as well as the ongoing tensions between Israel and Iran. The markets are watching events in the Middle East with caution, fearing the impact that further escalations could have on crude oil prices. Meanwhile, the fragility of US-SA diplomatic relations, typified by the introduction of the U.S.-South Africa Bilateral Relations Review Act in Congress, has heightened the focus on whether South Africa’s foreign policy positioning may weaken the country’s relations with western economies. The new bill provides for the US Congress to review US-SA relations, increasing the potential that South Africa could lose its African Growth and Opportunities Act (AGOA) benefits at the next review.
Local Market Developments
Local CPI inflation eased in March, to 5.3% y/y (0.8% m/m), from February’s 5.6% y/y, below the market consensus of 5.4% y/y. March sees a fall in housing, transport, and education costs, while a petrol price increase occurred, as well as ‘sin tax’ increases.
Inflation is having a key effect on consumer affordability in South Africa, and the South African Reserve Bank recently reaffirmed its resolve to continue to combat high inflationary pressure in South Africa, stating that interest rates will only be cut once CPI inflation achieves, and then remains, around 4.5% y/y. Reserve Bank governor Lesetja Kganyago has reiterated that there are upside risks to its inflation outlook from higher oil prices as a result of tensions in the Middle East and also from the tight global financial conditions as interest rates stay higher for longer in the United States.