Last week saw central bank decisions affecting the cost of borrowing for 6 of the 10 most traded currencies, highlighting divergence in the perception of inflation risk. The Bank of Japan surprised with its first interest rate hike since 2007, the Swiss National Bank cut rates, while the other central banks kept rates on hold in line with market expectations. The Federal Reserve signalled that it still plans three rate cuts before the end of the year, but this will be dependent on data supporting that inflation is moving sustainably toward their 2% target.
This week our local Monetary Policy Committee (MPC) meets, with the expectation that the repo rate will remain unchanged as recent inflation prints have surprised to the upside.
International Market Developments
The Federal Reserve left the fed funds rate unchanged at a 23-year high of 5.25%-5.5% for a fifth consecutive meeting in March 2024, in line with market expectations. They also signalled that they still expect three rate cuts before the end of the year, however, they do not expect it will be appropriate to reduce the target range until they have gained greater confidence that inflation is moving sustainably toward 2%. They also released new quarterly economic projections that showed that they now expect the economy to grow 2.1% this year, up from the 1.4% projection in December 2023 and above what is considered the U.S. economy’s long-run potential.
Local Market Developments
CPI for February increased more than expected, to 5.6% y/y, from 5.3% y/y in January.
Core CPI also exceeded expectations in February, increasing to 5.0% y/y, from 4.6% y/y in January. The jump in core inflation, which was a once off impact for this year, was as a result of medical health insurance (which accounts for 7.1% of the CPI basket) increasing 10.3% m/m in February.
The Bureau for Economic Research (BER) released their inflation expectations for Q1 showing the average expectation for this year declined to 5.4% from 5.7% previously. The expectations for the outer years also declined with 2025 now seen declining to 5.3% from 5.6% and to 5.2% in 2026. The results influence decision-making by the South African Reserve Bank’s monetary policy committee, which prefers to anchor inflation expectations close to the 4.5% midpoint of its target range.
The SARB’s MPC meets this week and is expected to keep the repo rate on hold at 8.25% and maintain a relatively cautious tone in its MPC statement given the upside risks to the inflation outlook from the recent upside surprise in headline and core inflation, renewed upside risks to food inflation, and currency risks from the uncertain outcome of the upcoming elections.