The primary focus of the May MPC meeting was the balance of risk assessment, deemed broadly balanced for the first time since 2021. It is worth noting that this policy meeting occurred during the general election week, contributing to a highly uncertain political backdrop. The MPC statement acknowledged that market participants continue to closely monitor the direction of domestic policy, a topic that has dominated investor conversations in recent months. While conditions remain uncertain, the committee expects greater clarity to be achieved in due course.
The context of the July MPC meeting is a decline in political uncertainty, although the new dispensation has ushered in new risks. However, several domestic and external inflation drivers have improved, raising the probability of an earlier inflation return to the target's mid-point.
ICIB's expectations
The upcoming July MPC meeting is anticipated to be more eventful than recent meetings, which have seen unanimous decisions to maintain the policy rate unchanged. With an expected downward revision in the forecast, the MPC will likely acknowledge that inflation is following a stable disinflationary path. Furthermore, two of the six MPC members may lean towards a rate cut, potentially paving the way for a rate reduction during the September MPC meeting. The timing for the expected return of the inflation forecast to 4.5% will be of particular interest, which was projected to occur in Q2 2025 in the May forecast. The MPC has consistently adhered to the interest rate path outlined by the QPM since 2022, primarily due to the upside balance of risk assessment. According to the May QPM forecast, rate cuts of 66 bps are projected for 2024, with a total reduction of 100 basis points by the end of 2025, bringing the policy rate to 7.34%.
ICIBs inflation forecast declines 4.9% in August, an average of 4.3%, 4.5% and 4.5% in Q4 24, Q1 25 and Q2 25. We forecast a total of 100bps of rate cuts over the next 12 months, starting with a 25bps rate cut in September. The implied 3m JIBAR rates are assigning a probability of 40% to a 25bps rate cut at the July MPC meeting, which we think is higher at 60%, and a total of 100bps in 12 months.
What has changed?
Several developments could contribute to a revision in the inflation forecast. These include the appreciation of the rand, lower outcomes for fuel (Q3) and food prices (Q2), an improvement in the BER's inflation expectation survey, and a moderation in US inflation. The risk premium embedded in SAGB yields has compressed as sentiment has improved, alleviating pressure on the government's funding costs. However, it is premature to lift GDP growth forecasts aside besides from lowering the assumption of the number of load shedding days.