As the SARB prepares to set monetary policy tomorrow, investors eagerly await insights into the economic landscape shaping the central bank’s considerations. The SARB faces a complex environment: globally, it must remain cautious of a potential economic slowdown, while domestically, uncertainty persists regarding the ongoing budget negotiations and the final fiscal framework. A budget outcome that avoids inflationary pressures, such as a VAT hike, could alleviate some of the SARB’s concerns, creating a more favourable backdrop for monetary policy decisions. It is worth noting that the ANC and DA are negotiating to resolve the budget impasse, with the DA reportedly seeking concessions such as privatisation of ports and rail systems, expenditure reprioritisation, and tax relief for low-income earners, in exchange for supporting the budget.
As for inflationary dynamics that the SARB must consider, recall that headline inflation rose to 3.2% y/y in January from 3.0% in December, driven primarily by a reduced deflationary effect from fuel prices. This marked the third consecutive month of modest increases in the CPI, with forecasts suggesting a further uptick to 3.4% y/y in today’s data, potentially fuelled by higher fuel and food prices. Following its low point in October 2024, CPI growth continues a gradual rebound. Nonetheless, this measured pace remains manageable, with inflation hovering near the lower end of the SARB’s 3%-6% target range. Should a disciplined budget be confirmed, current indicators suggest the SARB may have room to implement at least one additional interest rate cut before year-end.
ZAR Markets
While the SARB navigates global and domestic uncertainties, the interplay of moderating inflation and resilient consumer activity expected to be reflected in today’s prints will impact its policy decision. However, more important for markets in the meantime will be external developments. For one, the Fed is expected to hold rates steady today, but it is less clear how policymakers will tweak the Summary of Economic Projections. Across the Atlantic, it is noteworthy that Germany’s lower house passed a landmark spending package that will unlock hundreds of billions of euros in debt financing for defence and infrastructure, and likely support the EUR. Further east, Russian President Putin agreed to temporarily halt attacks on Ukrainian energy facilities but rejected President Trump’s proposed 30-day ceasefire as a step toward lasting peace, which could support market sentiment at the margin. None of this has translated into ZAR gains, however, with the currency drifting back towards R18.2000/$ this morning.
Global FX Markets
The Japanese yen fluctuated after the Bank of Japan (BOJ) kept its short-term interest rate steady at 0.5% on Wednesday, a widely anticipated decision reflecting caution amid global economic risks from U.S. tariffs. The yen, initially dipping, stabilized at 149.31 per dollar, with focus shifting to Governor Kazuo Ueda’s briefing for hints on future rate hikes. Meanwhile, the U.S. dollar struggled near a five-month low of 103.19 against a currency basket, ahead of the Federal Reserve’s policy decision, widely expected to maintain current rates. Currency markets remained subdued as traders awaited Fed insights into Trump’s tariff policies and their economic impact, with nearly 60 basis points of rate cuts priced in by year-end. Globally, the euro hit a five-month high of $1.0955, buoyed by Germany’s approval of a massive spending surge, while sterling neared a four-month peak at $1.3001. The Australian and New Zealand dollars saw minor movements amid cautious risk appetite. Geopolitical tensions, including Israeli airstrikes in Gaza and failed Ukraine ceasefire talks between Trump and Putin, added to market uncertainty, though Germany’s fiscal shift—potentially the largest since reunification—offered optimism for European growth if paired with structural reforms.