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Key takeouts:
-Policy rate cut by 25bps in a unanimous decision, after it “ultimately reached consensus on 25bps”.
-SARB projects lower inflation and states that “it looks like it can be sustained”.
-Focus shifts from current inflation to where inflation would be in the future (in 12 months).
-SARB’s assessed risks to the inflation forecast to be balanced.
The decision to cut the repo rate by 25bps, was unanimous. ICIB’s base case was for a 25bps rate cut but attached a 50% probability of a 50bps rate cut following August’s inflation receding to 4.4% (Bloomberg consensus at 4.6%) and a 50bps rate cut by the FOMC, which indeed transpired.
US monetary policy has become more restrictive as inflation receded faster than expected, affording the FOMC the gap to front-load rate cuts to focus more proactively on moderation in the labour market and engineer a soft landing.
The Fed funds rate is also further away from the neutral rate, with the median Dot plot forecast showing 200bps of rate cuts by end 2025 (50bps by end 2024 and 100bps end 2025), showing that current rates are further away from the neutral rate. In South Africa, the normalisation in interest rates from a very restrictive level is likely to be more gradualistic, with the QPM’s neutral rate at 7.09% (~100bps from current levels).
MPC’s comments and the case for a gradual normalisation in interest rates
“Approaching the end game with caution” and “a case for caution”: Even though the MPC’s risk assessment to the inflation outlook is deemed to be balanced and it looks like it can be sustained, the MPC’s decisions remain risk based. A 25bps rate cut is deemed to be prudent.
The upside risks to the inflation forecast globally are the complex external environment and unpredictable geopolitical environment and risks, and inflationary shocks through trade restrictions and supply chain restrictions.
Locally, electricity tariff increases double that of inflation remain a concern. These dynamics suggest that the MPC is not convinced of its H2 25 inflation forecast of 4.35% in H2 25.
Central banks are moving carefully, and policy stances remain relatively tight: The ECB and BOE, both with inflation mandates, have proceeded cautiously. The first rate cuts have not been followed through by rate cuts at the next meeting. A “go-stop-go” assessment from a risk-based approach is followed.
Key take aways - seeing is believing
- The MPC's confidence in its inflation in H2 25 is not high.
- There is not a huge amount of room for the repo rate to recede to a neutral rate of 7.09% (~100bps away from the current repo rate of 8.0%).
- Rates may only be moving towards neutral in 2025.
- Anchoring backward-looking inflation expectations is crucial.
- Our base line forecast of 25bps rate cuts at each of the next three MPC meetings, is unchanged.
Macro forecasts: Inflation down/GDP slightly higher
The SARB revised its inflation lower as expected as is more aligned with ICIBs. Q4 24 is projected 3.6%; H1 25 at 3.7% and H2 at 4.35%. The forecast for H2 25, however, faces upside risk due to Eskom’s request for an electricity tariff increase of 36% compared to the SARB’s assumption of 10.0% and an increase of 12.1% in 2024. While Nersa is unlikely to grant Eskom’s request, the risk of administered price inflation again frustrating inflation settling at the mid-point of the target, is high.
GDP growth projection
The SARB’s GDP growth forecast of 1.1% for 2024 was unchanged, but 2025 and 2026 were raised marginally to 1.6% (P: 1.5%) and 1.8% (1.7%). The cessation of load shedding was the key driver, reducing GDP growth by 0.13ppt (P: -02ppt) in 2024 and by zero in 2025 (P: -01%).
QPM terminal rate
We flagged the possibility of a decline in the terminal real neutral interest rates. The QPM model lowered the repo rate to 7.17% (P: 7.29%) and 7.0 ((Pl 7.25%) by end 2025 and 2026. However, this can be ascribed to a lower headline inflation rate as the neutral real interest rate, was unchanged at 2.7%. This shows that the SARB has not adjusted the country risk premium or the G3 neutral real interest assumptions.
Road map to November’s MPC meeting
Investec Corporate & Institutional Banking's baseline scenario is for the MPC to deliver a 25bps rate cut at the November MPC meeting and a further 50bps in H1 25. In the context of the MPC’s risk assessment that is balanced, the next MPC meeting scheduled for November 21 will be preceded by the US elections on 5 November and FOMC meeting on November 7. The MPC’s starting point for the R/$ exchange rate was R18.04/$ (currently R17.49/$) from R18.35/$ previously.
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