The SARB has concluded its research on lowering the country’s inflation target and believes a lower goal would be beneficial, according to Governor Lesetja Kganyago. In a speech posted on the central bank’s website, Kganyago emphasised that achieving stronger price stability, rather than merely meeting minimum requirements, is a priority. He argued that South Africans would be better off with lower inflation and highlighted that the country’s current target range of 3-6% is both higher and broader than those of most other nations. While a reduction in the SARB’s inflation target may mean higher for longer interest rates initially, they would eventually lead to lower interest rates permanently once inflation expectations have adjusted. Such a change would thus be welcome, although it may face political opposition given a misunderstanding of the fact that high inflation is, by and large, worse for South Africans than a short period of high interest rates.
On the data front, note that South Africa’s mining production contracted 2.4% y/y in December, significantly missing the consensus expectation on Bloomberg of a 1.8% increase and deepening from November’s 0.9% decline. The contraction was driven primarily by a sharp drop in platinum group metals (-7.1%) and gold (-8.4%), but partially offset by gains in manganese ore (+8.7%) and coal (+2.5%). Despite this, total mining output for 2024 saw a modest 0.4% increase. While the sector posted slight annual growth, the December and Q4 downturns highlight structural weaknesses. Discussions at the recent Mining Indaba largely focused on political issues rather than concrete policy reforms, reinforcing concerns over the industry’s outlook. Without meaningful policy shifts and infrastructure improvements, production is unlikely to see sustained growth. This stagnation threatens broader economic activity and government revenues, particularly amid rising global commodity prices.
ZAR Markets
US President Trump tasked his economics team with devising plans for reciprocal tariffs on every country taxing US imports, and to also take into account non-tariff barriers. While there are still weeks of investigative work to do before an April deadline, and therefore some time to negotiate, Trump’s plan for reciprocal tariffs that take into account non-tariff barriers could be big. However, the market’s response has been limited, with US Treasury yields still falling. Consequently, FX market risk appetite is positive, with most EM currencies, including the ZAR, trading on the front foot this morning. Technically, the USD-ZAR continues to pivot around its (rising) 50-day moving average at 18.5356, with this set to remain the case into the weekend.
Global FX Markets
The U.S. dollar and major currencies remained steady on Friday as traders assessed the impact of Washington’s proposed reciprocal tariffs, which will not be immediately implemented. President Trump directed his team to draft tariff plans against countries taxing U.S. imports, with implementation potentially weeks away. Markets found relief in this delay, seeing room for negotiations. Despite looming tariff concerns, a U.S. producer price report eased inflation fears. While PPI exceeded forecasts, core PCE inflation is expected to be lower than feared, influencing Federal Reserve expectations. Traders priced in 33 basis points of rate cuts for the year, slightly higher than before but down from pre-CPI data levels. The dollar index remained flat at 107.07, while U.S. Treasury yields declined, helping the yen recover to 152.64 after weakening earlier. The euro hovered near a two-week high, supported by optimism over potential Ukraine-Russia peace talks. Sterling reached its strongest level since January 7, following unexpected UK economic growth. The Canadian dollar also stayed near a two-month high, supported by lower U.S. Treasury yields.