CAUTIOUS SARB CUTS BY 25BPS AND A WELCOME UPTICK IN BUSINESS SENTIMENT

This is an extract from the Weekly Review of 22 November 2024. The full Weekly can be found here (for free, but sign up if you want to receive notifications of new editions and other BER publications)

The Week in Perspective written by Tracey-Lee Solomon

Outside of the concerns about a recent streak of foodborne illnesses in SA, there was some positive news to share on the domestic front this week. The rand strengthened following welcome news late last Friday that the credit rating agency S&P Global had upgraded SA’s rating outlook from stable to positive. This decision was driven by plans for accelerated economic reforms under the Government of National Unity (GNU) and the expectation of increased private sector investment. The GNU has helped alleviate some of the significant political risks weighing on the country’s credit rating, but faster economic growth is needed before we see credit rating upgrades. Still, the improved outlook likely contributed to a slight drop in bond yields, which had declined by 16 basis points (bps) by the end of Thursday.

On Tuesday, further optimism came when data from Stats SA showed that annual consumer inflation moderated to 2.8% in October, the lowest level in nearly four years. This was followed by the release of the Q4 RMB/BER Business Confidence Index (BCI), which rose by 7 points to 45. This was the third consecutive increase and lifted the BCI to the highest level since early 2022. Encouragingly, the results of the Q4 business survey show that the economy has been in an upswing phase for the last two quarters. Indeed, our business cycle clock is moving closer to “Boom” territory. Of course, we still need to see a few more quarters of similar results before we get too excited but it is clear that conditions have improved in Q4 compared to a year ago and are expected to remain so next quarter.

Finally, the SARB Monetary Policy Committee (MPC) cut the repo rate by 25bps on Thursday, following a similar reduction in September and aligning with market expectations. The decision was unanimous, with the Governor confirming that a larger cut of 50bps had not been considered. While inflation risks are currently viewed as balanced, the SARB emphasised mainly the upside potential - for example, the dollar’s strength since the US elections. For our interest rate following the meeting, clients can find a detailed Comment here. In short, the SARB will likely continue to tread carefully going forward, with many of the factors causing uncertainty unlikely to disappear over the near term. Meanwhile, the SA Revenue Service (SARS) said that it had issued more than 1.9 million tax directives with a total gross value of about R35bn.?A quick sum shows that this is equal to about R18.4k per withdrawal on average. This suggests that many withdrawals are from those with pension savings of below R300k in total (as those with higher savings can withdraw R30k this year) – indicative of a consumer under pressure. SARS did not provide an update on the tax liability for these withdrawals, but it will be more than the R5bn pencilled in by the National Treasury.

Back to monetary policy, recent speeches by US Federal Reserve (Fed) officials underscore the growing uncertainty surrounding US monetary policy ahead of the December monetary policy meeting. For example, Governor Michelle Bowman, who favours a more gradual approach to easing policy, pointed to the recent stagnation in inflation, noting that headline inflation ticked up to 2.6% in October. Meanwhile, Governor Lisa Cook offered a more optimistic perspective, emphasising that inflation remains on a downward path while the labour market is gradually cooling. It appears investors were slightly more convinced by the former, and markets have started to scale back expectations for rate cuts. Last week, markets were pricing in a more than 70% likelihood of a 25bps rate cut in December; this has since dropped to 55%. The shift reflects persistent inflation, robust economic growth, and concerns over potential inflationary pressures from Donald Trump’s proposed tariffs.

In Europe, the European central bank (ECB) reported that negotiated wage growth in the Eurozone (EZ) rose sharply to 5.42% y-o-y in Q3, up from 3.54% in Q2, as workers sought compensation for incomes eroded by previous spikes in inflation. The ECB is still expected to lower its benchmark interest rate by 25bps in December. However, officials may use the wage data to temper expectations for further easing. This week, final inflation figures for the EZ confirmed a 2% y-o-y rise in October. ECB officials are also monitoring the possible inflationary impact of increased US potential tariffs expected next year.

In contrast to the Fed and ECB, which are, on balance, expected to cut in December, the Bank of England (BoE) will likely maintain its current interest rate level at the December meeting. UK inflation unexpectedly rose last month, exceeding the BoE’s 2% target. It was more concerning that headline, core, and services inflation all accelerated. Services inflation rose to 5.0% in October from 4.9% in September. Core inflation, excluding volatile components like energy and food, also edged up unexpectedly to 3.3%, compared to 3.2% in September. After its November rate cut, the BoE signalled that any future easing would be gradual, forecasting inflation to remain above its 2% target until early 2027. This projection reflects stimulus measures from the new Labour government’s first budget, including a nearly 7% increase in the minimum wage set to take effect in April. Regarding current wages, the rate of pay rises held steady in October. However, wage growth is expected to moderate next year as employers respond to higher social security contributions (mentioned in the budget) by limiting pay increases.

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