The SARB delivered its third consecutive interest rate cut at the January MPC meeting yesterday, reducing the repo rate further towards a neutral level. However, unlike previous unanimous decisions, this cut was passed with a split vote of 4-2, indicating a shift to a more cautious approach. The two dissenting members favoured holding rates steady, reflecting heightened global economic uncertainty.
Governor Lesetja Kganyago highlighted concerns over the outlook for US monetary policy and the possibility of a global trade war as key external risks influencing the SARB’s decision-making. While global conditions remain uncertain, the domestic economic outlook was assessed as relatively balanced. However, inflation risks remain tilted to the upside, contributing to the more measured policy stance.
Another factor to note is that NERSA announced its allowance for an Eskom price hike right after the MPC meeting. The regulator is allowing Eskom a 12.7% increase for this year. This is well below Eskom’s requested increase and below the assumption presented by the SARB at the MPC meeting.
On the whole, the less dovish shift in US monetary policy has filtered into the SARB’s outlook, affecting its policy trajectory. The central bank’s Quarterly Projection Model (QPM) now suggests that the repo rate will drift slightly lower over the coming years before stabilising at around 7.25%, just 25bps below the current level. This implies limited scope for additional easing in the near term, reinforcing the SARB’s preference for a prudent approach to monetary policy.
ZAR Markets
The ZAR’s reaction to the SARB’s policy update was tepid. This suggests that the 25bp rate cut and accompanying hawkish forward guidance were already priced in. The ZAR immediately went back to being a price-taker, tracking broader hard-currency moves after Governor Kganyago’s presser. Although the ZAR appreciated after the policy update, this was consistent with a broader decline in the dollar on the day. Since then, the market has turned, with the USD on the front foot this morning after US President Trump reiterated plans to impose a 25% tariff on imports from Mexico and Canada. The announcement spurred fears of a trade war that could weigh on economic growth and stoke inflation, in turn weighing on market sentiment. Tariff concerns will likely continue to drive trade over the weekend, while the US PCE core inflation data could also add some impetus. Local trade balance data, meanwhile, will be relegated to the back burner.
Global FX Markets
The yen was poised for its strongest January performance since 2018, driven by expectations that the Bank of Japan would continue raising interest rates while other major central banks moved toward easing. Deputy Governor Ryozo Himino reaffirmed the BOJ’s commitment to rate hikes, and Tokyo’s core inflation hit its highest annual pace in nearly a year, reinforcing this outlook. The yen gained 1.9% for the month, trading at 154.19 per dollar. Meanwhile, the Mexican peso and Canadian dollar faced volatility ahead of the looming February 1 deadline when U.S. President Donald Trump is expected to impose 25% tariffs on imports from both countries. The Canadian dollar hovered near a five-year low at C$1.4490, set for a 1% weekly decline, while the Mexican peso, recovering from a sharp fall, was still on track for its worst weekly performance since October, down 2%. In broader markets, the U.S. dollar edged up 0.1% to 108.18 but was on track for a 0.3% monthly decline. The U.S. economy showed slowing growth in the fourth quarter, but consumer spending remained strong, allowing the Federal Reserve to take a patient approach to rate cuts. Fed Chair Jerome Powell indicated that while rates remain high, easing could still be on the table. The euro fell 0.9% for the week to $1.0392 after the European Central Bank cut rates and signaled another reduction in March due to weak economic growth. Traders anticipate a similar move from the Bank of England, with a 25-basis-point cut priced in for next week. The British pound, which faced significant selling pressure earlier in the month, traded at $1.2423 but was down 0.7% for January.