SARB SEES INFLATION DECELERATING FASTER THAN EXPECTED, CHINA STIMULUS DISAPPOINTS

This is an extract from the Weekly Review of 18 October 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

Amid a mixed bag of internal trade data releases, the domestic economic news unpacked the South African Reserve Bank’s (SARB) biannual Monetary Policy Review (MPR). Administrated prices remain a key concern for the Bank, with more details around Eskom’s hefty tariff increase application discussed in more detail below. Internationally, the European Central Bank (ECB) cut its policy interest rate, in line with expectations. The most important data release was arguably this morning’s China GDP release, with the much-anticipated announcement of the details around the fiscal stimulus package earlier in the week disappointing markets.

Starting with the SARB’s MPR release on Tuesday, the bank noted that it had to downwardly revise its inflation forecasts due to faster-than-expected deflation, driven by food and fuel. As headline inflation eases, the Bank is now focused on tracking the second-round effects of inflation, including core inflation and inflation expectations. The SARB also flagged that the two-year ahead inflation expectation remains above its preferred target. Furthermore, ongoing risks stem from volatile supply-side inflation, particularly from geopolitical factors affecting oil prices and domestic administered price pressures.

On Thursday, speaking at Stellenbosch University, SARB Governor Lesetja Kganyago suggested that SA could adopt a lower inflation target with minimal cost. The governor emphasised that aiming for a 4.5% midpoint has helped reduce inflation and interest rates with little impact on economic growth. He argued that a narrower inflation target aligned with other emerging markets and would better anchor inflation expectations at lower levels, supporting the bank's long-term goals.

In global news, Q3 GDP data from China released earlier this morning showed that the economy expanded at its slowest pace in 18 months. On an annual basis, the economy grew by 4.6%, below the 4.7% recorded in Q2 and the government's target of about 5% growth. Indicative of weak domestic demand, prices declined for a sixth consecutive quarter. Concerns about the weak growth have led authorities to announce a comprehensive stimulus package in recent weeks. On the fiscal front, China pledged on Saturday to "significantly increase" debt to stimulate its slowing economy but left investors uncertain about the scale of the stimulus package. Finance Minister Lan Foan announced measures to help local governments manage debt, support low-income individuals, and boost the property market and state banks. However, he did not specify the total amount of funding. This lack of detail has kept investors on edge as China's economy struggles with deflationary pressures and a weakened property market.

Further steps announced by the Chinese Housing Ministry on Thursday include expanding a "white list" of housing projects eligible for financing and increasing bank lending for these developments to 4 trillion yuan ($562 billion) by year-end. The government will also accelerate urban redevelopment, including the resettlement of people to absorb housing inventories.

Despite these measures, which investors had hoped for, the absence of specific figures led to a 4% weekly decline in the Shanghai Stock Exchange. Investors may have to wait until China's legislature meets, though a date has yet to be set, for further clarification on the economic plan.

Speaking of financial markets, strong earnings from US tech companies boosted the S&P 500, while lower inflation in the Eurozone and UK fuelled expectations of more aggressive monetary easing by the ECB and BoE, lifting European stocks.

The US dollar surged to an 11-week high, driven by strong retail sales and lower-than-expected jobless claims, signalling a robust economy. The SA rand slipped against the stronger dollar. The local currency also lost ground to both the euro and the UK pound amid more risk-off sentiment, as seen in EM bond yields and the gold price. Indeed, SA bond yields rose by 16 basis points.

The gold price hit another record high due to geopolitical tensions and prospects of further US Federal Reserve rate cuts. Markets are now pricing in a 90% chance of a?25 bps Fed cut at its meeting in November. Weaker inflation data in Europe and the UK also boosted expectations of ECB and BoE easing, supporting gold prices. This is because it is a non-yielding asset that tends to gain when interest rates (and bond yields) fall.

The Brent crude oil price fell 4.9% this week. Israel’s announcement that it would not target Iranian oil facilities eased concerns about supply disruptions. In addition, OPEC's downward revision to its 2024 and 2025 demand growth forecasts contributed to the decline. Separately, the UK imposition of sanctions on Russian oil and LNG vessels did little to pressure the market.

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