Last week, the SARB raised the repo rate by 75 bps, taking it above pre-pandemic levels, to 7%, the Fed’s meeting signaled a slowdown in the pace of interest rate hikes as inflation pressures were seen to ease, while lower bank reserve requirements increased support for the Chinese economy as it continues to be hit by surging Covid cases, a continued property downturn and recent waves of protests.
International and Domestic Market Developments
The recent global risk-on sentiment continued following the Fed’s November FOMC minutes, which signaled a slowdown in the pace of interest rate hikes as inflation was seen to ease over the long run. Fed Chair Jerome Powell and several other policymakers signaled a likely 50 bps hike at the December FOMC meeting, in line with such thinking.
Fed economists flagged that the chances of a US recession in the next year have risen to almost 50%, given a slowdown in consumer spending, the risk of further global economic setbacks, and further policy tightening. This was the first recession warning from the FOMC since the committee started hiking rates in March.
The Peoples Bank of China will lower its reserve requirement ratio for banks in a move that will inject about 500 billion Yuan back into the economy to support industries damaged by the Covid pandemic. The move follows recent government actions to help the economy, including a rescue package for the property sector. The Chinese economy has been hit by surging Covid cases, a continued property downturn and more recent waves of protests.
The ongoing Russia-Ukraine war continues to have an adverse impact on global prices, as G7 nations failed to reach agreement on a proposed price ceiling on seaborne Russian oil aimed at curbing Russia’s ability to fund the war while allowing the product to continue flowing.
Local Market Developments
The October CPI came in higher than expected at 7.6% y/y from 7.5% y/y in September. This was a reversal from the downtrend following the CPI peak in July.
The SARB hiked the repo rate by 75 bps, taking it above pre-pandemic levels, to 7.00%. The bank assesses the risks to inflation to be to the upside, while the oil price market is expected to remain tight with upside risks to prices. Local food price inflation is also a risk with overall inflation only expected to be at the mid-point of the target range in 2024.
Eskom received a major lifeline from PetroSA in the form of 50 million liters of diesel to keep its open-cycle gas turbines running. These are used to generate energy during times of high demand across the country. This follows Eskom’s announcement that it had exhausted its annual budget for diesel, raising concerns of more widespread blackouts following high levels of breakdowns.