Global financial markets remain focused on the US CPI this week, while locally, South Africa’s Finance Minister and SARB Governor reaffirm the lowering of the inflation target framework.
International Market Developments
The US CPI print for August is in focus this week, with market consensus currently expecting Thursday’s print to come in at 2.9% y/y, from 2.7% y/y in July. The Fed has kept rates unchanged so far this year while assessing the inflationary impact of President Trump’s tariffs. Investors are now fully pricing in an interest rate cut at the next FOMC meeting on 17 September. The FOMC is expected to cut the Fed funds target by 25bps to 4.00-4.25%.
This is aligned with comments recently made by US Fed Governor Christopher Waller, who recently stated that the Fed should begin lowering borrowing costs and who emphasised the need for multiple rate cuts in the coming months to support the economy. Waller noted that the current benchmark interest rate is above the neutral level, indicating that monetary policy is restrictive. He expects inflation to gradually approach the Fed’s 2% target over the next six to seven months.
The Fed expects the economy to experience a gentle cooling but stressed that it is not forecasting a recession with interest rates still having some room to come down gradually. However, the Fed has also cautioned that there remains a reasonable possibility of more persistent price pressures given the ongoing uncertainty around tariffs.
On geopolitics, Chinese President Xi Jinping hosted a two-day summit in China, where he has called on regional powers, including Russia and India, to join China in leveraging their economic influence to counterbalance the West. The summit takes place amid rising geopolitical and trade tensions. President Xi remarked that the world is undergoing a period of turbulence and change. He emphasised the collective need to uphold an orderly multi-polar world. He urged participating nations to expand the scope of cooperation, capitalize on each country’s unique strengths, and jointly share the responsibility of promoting regional peace, stability, and prosperity.
Local Market Developments
Last week, Finance Minister Enoch Godongwana and SARB Governor Lesetja Kganyago issued a joint statement addressing the inflation targeting framework. At its July MPC meeting, the SARB reaffirmed its preference for CPI to remain anchored near the lower end of the current 3-6% target range. Similarly, National Treasury’s 2024 Macroeconomic Policy Review emphasized that low and stable inflation supports economic growth and noted that monetary policy objectives have largely been met. The joint statement reaffirmed that macroeconomic policy decisions, including any adjustments to the inflation target, will remain evidence based. Should changes to the inflation target band be agreed upon, Minister Godongwana will make a formal announcement at the earliest appropriate opportunity to anchor inflation expectations effectively.