The SARB will likely look beyond the sharp slowdown in inflation evident in yesterday’s CPI data and only cut the repo rate by 25bps today. Although headline inflation dropped below the central bank’s 3%-6% target range to a multi-year low of 2.8% y/y last month, the ever-cautious SARB will likely be keeping an eye on new price risks that are emerging.
In particular, the incoming Trump administration in the US brings with it plenty of uncertainty regarding global trade dynamics that warrant some cautiousness. Moreover, with the Russia-Ukraine war entering a dangerous new phase this week after US and British missiles were used to strike deep in Russian territory, there is reason to maintain a gradual pace of rate cuts to keep the rand supported in these uncertain times.
It is also worth noting that the drop in headline inflation was primarily due to falling fuel inflation, which is historically more volatile than other categories and not reflective of general demand-side price pressures. In fact, fuel inflation is expected to pick up in November as oil prices have risen and the ZAR has weakened somewhat. As a result, this could lead to an uptick in headline CPI growth back to the target range in November.
Looking beyond today’s expected rate cut, markets expect the SARB to lower rates again in Q1 2025. Slightly lower domestic interest rates will support consumer spending and corporate capital outlays. However, the effect of lower interest rates should not be overstated. There are strong structural headwinds to contend with that are suppressing economic growth.