In an unsurprising move, last week’s MPC message from the SARB was that interest rates would remain higher for longer as inflation expectations remained elevated. This move was echoed internationally by the Fed as it again signalled to markets that it is in no hurry to cut rates.
International Market Developments
The Fed still has room to wait to gain confidence that inflation is on a sustained path to the 2% target. Upwards revision to the GDP forecast for the US economy for this year shows that the FOMC members are more confident about economic growth, which reduces pressure for an imminent interest rate cut. The first interest rate cut is expected at the June FOMC meeting, with the market currently pricing in an 83% probability of a 25 basis point rate cut. The anticipated US interest rate cut cycle is expected to start in the second half of 2024 and extend into 2025.
UK GDP growth contracted by 0.3% q/q in Q4:23 after having declined by 0.1% q/q in Q3:23. The data confirms that the UK economy slipped into a recession last year.
Local Market Developments
The SARB MPC kept the repo rate unchanged at 8.25% in a hawkish decision that was quite cautious but reflected upside risks to the inflation outlook. A significant development at this meeting was the fact that the SARB is now seeing its inflation target of 4.5% only being achieved in 4Q25, one year later than what it expected in January.
The SARB has revised its inflation forecast upwards slightly after a higher-than-expected outcome of February’s Consumer Price Index (CPI) inflation, which came in at 5.6% compared to market expectations of 5.5%.
The SARB’s outlook on food and fuel inflation is at risk of further acceleration if drought conditions locally worsen and the rand remains weak due to high global policy rates and weaker terms of trade. This implies that interest rates are expected to remain higher for longer due to the increased inflation risks.