Last week, the Fed kept interest rates unchanged, but signalled they are moving closer to cutting rates on the back of easing inflation and cooling US non-farm payrolls (NFP) data. Weaker than expected employment growth together with an increase in unemployment sparked fears of a slowdown in the US economy, prompting predictions of action by the Fed to cushion the economy.
International Market Developments
The US non-farm payrolls (NFP) undershot expectations in July, coming in significantly lower than expected at 114K, from a downwardly revised increase of 179k (previously 206k) in June. The unemployment rate increased to 4.3% in July, from 4.1% in June. The data suggests a softening labour market at a time when the Fed is considering cutting the Fed funds rate. This NFP data and the US ADP private sector payrolls also undershooting expectations in July provided further signs of a softer labour market. The weaker-than-expected labour market data opens the door to the possibility of a 50 bps interest rate cut in September.
The Bank of England cut its benchmark interest rate by 25 bps, to 5.0% last week after the policy rate had been at a 16-year high for 12 months. Headline inflation registered in line with the bank’s target of 2.0% in May and June, albeit that services inflation remained stubbornly high. The bank’s Monetary Policy Committee signaled that further cuts will only take place following more evidence of disinflation to ensure that inflation stays low and that interest rates are not cut “too quickly or too much”.
The Bank of Japan has hiked its benchmark interest rate to 0.25%, from 0.1%. The BOJ noted that the decision came as prices have been developing broadly in line with forecasts. However, the central bank highlighted that it would need to pay attention to upside risks to the inflation forecasts. The bank also unveiled plans to reduce bond-buying.
Local Market Developments
The South African Reserve Bank has constructed a new inflation measure (termed Supercore inflation) to monitor underlying price developments that will help support monetary policy decision-making. The measure will assist policymakers to distinguish short-lived inflationary pressures from those showing more persistent trends.
While headline inflation is still above the midpoint of the central bank’s 3% to 6% target range, Supercore inflation has hovered around the midpoint in recent months, suggesting that demand-driven inflationary pressures are presently more balanced. That may add to the case for the central bank’s MPC to cut the repo rate as soon as September.