The US Federal Reserve started its long-awaited monetary easing cycle with a 50bp rate cut yesterday. While accompanying forward guidance was dovish, it was likely not quite as dovish as the market was positioned for. The Fed signalled that outsized 50bp rate cuts would not be the norm, with the updated dot plot and Summary of Economic Projections pointing to a more gradual path of monetary easing and no expectations of sharp economic deterioration in the coming quarters. Prior to yesterday’s meeting, the market was positioned for a significant chance of at least one more 50bp rate cut this year, and this may need to be priced out gradually if economic data out of the US fail to disappoint.
Following the Fed’s policy update, the focus will turn to the Bank of England and SARB today for their decisions. The former has already started its monetary easing cycle, but will likely stand pat today. The latter, however, is expected to start its rate-cut cycle, with the question now being whether the SARB front-loads its rate cuts too. While a 25bp rate cut is likely today, the SARB could discuss a bigger cut at the meeting given that CPI data published yesterday showed inflation is now below the mid-point of its target range. The real benchmark interest rate (the repo rate adjusted for year-on-year inflation) is currently at its highest in 19 years, while the ZAR is on a stronger footing, and the oil market outlook is also weakening. That all being said, the SARB’s conservative nature will likely prevent it from implementing a 50bp cut, but accompanying forward guidance could be decidedly dovish.