Central banks acted cautiously last week, opting to keep policy rates on hold during a high degree of market uncertainty. Domestically, inflation remained unchanged and below the SARB’s midpoint target.
International Market Developments
The US Federal Reserve opted to keep policy rates on hold for a second successive meeting, with the Federal funds target range maintained at 4.25-4.50%. This was in line with expectations, the market having already priced in a 99% probability that rates would remain constant ahead of the decision. Markets reacted positively to the FOMC decision, taking some comfort from the fact that the inflation forecasts were not significantly higher and that the dot plot still reflects two cuts this year. There are however mounting concerns that the economy is slowing, and that inflation could remain stubbornly high. Chair Jerome Powell acknowledged the high degree of uncertainty resulting from President Donald Trump’s significant policy changes but reiterated that the central bank is not in a hurry to adjust borrowing costs.
Local Market Developments
Local CPI inflation was unchanged in February, at 3.2% y/y, still well below the CPI inflation target midpoint, of 4.5% y/y. Food (and non-alcoholic beverages) inflation saw a 2.8% y/y outcome, from 2.3% y/y in January, with non-durable goods inflation rising to 3.1% y/y in February from 2.9% y/y a month previously.
The SARB’s monetary policy committee (MPC) opted to keep policy rates on hold with a pause in its rate cutting cycle, keeping the repo rate unchanged at 7.50%, in line with the Fed’s decision. The decision was however split, with only four committee members (out of the six) in favour of the no change stance, the other two preferring a 25bp cut. The SARB stressed that the current forecast had more moving parts than usual, with amended CPI basket weights and the recently announced hikes in VAT. However, more favourable fuel-price forecasts, on a lower projected oil price than previously anticipated, underpin the SARB’s reduced headline inflation forecast for this year from 3.9% y/y to 3.6% y/y.
Globally, uncertainty remains elevated, with the extent and trajectory of the US trade wars unpredictable. The SARB highlighted that with inflation in advanced economies remaining elevated, interest rates are likely to remain high for longer.