Last week, the SARB kept the repo rate unchanged at 8.25% as risks to the inflation outlook persist. CPI data for June is due out on Wednesday and will provide the next indicator, with inflation expected to have eased to 5.1% y/y, from 5.2% y/y in May. US market reaction was muted following President Joe Biden’s decision to drop out of the presidential race and endorse Vice President Kamala Harris.
International Market Developments
Even as the markets monitor developments in US presidential election race, the main market driver remains the Federal Reserve policy rate path, the latest corporate earnings (with the big tech companies reporting this week), and ongoing geopolitical risk.
The International Monetary Fund’s (IMF’s) World Economic Outlook Update was released last week. The IMF noted that the disinflation was taking longer than expected and delaying interest rate cuts. There were further pressures on the global economy from escalating trade tensions and increased policy uncertainty. Real global GDP growth is forecast to average 3.2% in 2024 (in line with the IMF’s April projection) and 3.3% in 2025, from 3.3% in 2023, with risks to the outlook seen as balanced.
Fed Chair Jerome Powell noted in Washington that inflation and economic activity had slowed, broadly in line with the central bank’s expectation. He further commented that data on price pressures between April and June “do add somewhat to confidence” that inflation will return to the Fed’s target. However, more data will be required to confirm that inflation is heading to the 2% target, a sentiment confirmed by comments from New York Fed President John Williams. The PCE index, the Fed’s preferred inflation gauge, will be the final data point on prices ahead of next week’s FOMC meeting. The market is currently pricing in for the Fed to begin reducing borrowing costs only at the September meeting.
Local Market Developments
The SARB kept the repo rate unchanged at 8.25%, in line with expectations. Two MPC members voted for a cut and four preferred lo leave the repo rate unchanged. The inflation outlook has improved, with CPI expected to average 4.9% y/y in 2024 (down from 5.1% previously), while headline inflation is expected to fall below 4.5% over the next few quarters due to lower fuel prices and decelerating food inflation. Somes risks to the inflation outlook remain, including currency weakness in a higher-for-longer global setting, sticky inflation expectations, high administered prices and rising services inflation.