Last week, the US Federal Reserve (Fed) lowered the federal funds rate target range by 25 basis points to 4% – 4.25%. The move was in line with market expectations. Locally, the SA Reserve Bank (SARB) opted to keep the repo rate on hold at 7%.
International Market Developments
Last week, the US Federal Reserve lowered the federal funds rate target range by 25 basis points to 4.00%–4.25%, in a widely anticipated move. Chair Jerome Powell highlighted a “shift in the balance of risks,” with the Fed placing greater emphasis on supporting employment rather than solely curbing inflation. Despite inflation forecasts being revised upward, the Fed expects two additional 25 basis point cuts later this year, with further easing possible in the outer years. The decision passed 11-1, with one policymaker advocating a larger cut. While the dot plot shows most members aligning around two cuts, divergent views among participants highlight uncertainty around the rate path. The FOMC justified the reduction by pointing to increasing signs of labour market weakness, even as inflation remains elevated. Importantly, Powell reiterated that future policy moves will remain data-dependent and assessed on a meeting-by-meeting basis.
Over in Europe, the Bank of England’s (BoE) Monetary Policy Committee (MPC) voted 7–2 to keep the bank rate at 4%, with two members preferring a 25 basis points cut. The decision reflects ongoing disinflation trends, though headline CPI remains high at 3.8% year on year in August, unchanged from July. Services inflation eased slightly to 4.7% from 5%, while core CPI slowed to 3.6%. The Bank warned that food prices could drive a temporary CPI uptick in September, with medium-term inflation risks persisting due to potential second-round effects. In addition, the MPC voted to slow the pace of quantitative tightening, reducing gilt holdings by £70bn over the next year versus £100bn previously planned, acknowledging potential strain on market functioning amid elevated long-term yields. The BoE reiterated its “gradual and careful” stance, emphasizing a commitment to bringing inflation sustainably back to the 2% target.
Looking ahead, US core PCE inflation, which excludes volatile and energy prices and is Federal Reserve’s chosen gauge of underlying inflation is due to be released on Friday.
Local Market Developments
Following two consecutive cuts, the SARB opted to keep the repo rate steady at 7% (prime at 10.5%) in September, in line with market expectations. Market consensus was divided, with one-third of analysts anticipating another cut, while the remainder foresaw a pause. The MPC vote reflected this split, with two members favouring a cut and four supporting an unchanged stance. The SARB noted that, having reduced the repo rate by 125 basis points since September last year, it will pause to assess the lagged impact on the economy, inflation expectations and risk dynamics. While the baseline forecast remains for rates to stay on hold through next year, the vote split highlights some support for earlier easing. Risks are now tilted towards further cuts if 1) global and domestic conditions ease exchange rate pressures, 2) CPI prints continue to moderate, and 3) inflation expectations show clearer convergence toward the 3% target.
Looking ahead, South Africa PPI numbers for August are due to be released on Thursday. Markets expect year on year PPI to have accelerated by 1.8% from 1.5% the month prior.