Central bank update | 'Liberation Day' looms for tariffs | SA CPI remains low

‘Liberation Day’ looms

The White House is set to impose reciprocal tariffs on 2 April (what US President Donald Trump calls Liberation Day), while delaying the implementation of industry-specific tariffs.

According to the Wall Street Journal: “The administration is now focusing on applying tariffs to about 15% of nations with persistent trade imbalances with the U.S.—a so-called ‘dirty 15’, as Treasury Secretary Scott Bessent put it last week. Those nations, which Bessent said account for most of the U.S.’s foreign trade, will be especially hard-hit with higher tariffs, said people with knowledge of the matter, though other nations could be given more modest tariffs as well.”

The FOMC keeps rates unchanged

Last week the Federal Open Markets Committee (FOMC) kept rates unchanged, as expected.

Fed chief Jerome Powell mentioned that the likelihood of a recession ‘has moved up but is not high’.  Nonetheless, there is an underlying fragility in the US that is not receiving much attention, as shown by a fall in the likelihood of individuals being able to raise US$2,000 in an emergency, or the rise in the probability of individuals missing a minimum debt payment over the next three months.

FedEx also revised down its outlook last week, citing “continued weakness and uncertainty in the U.S. industrial economy.” This is perhaps not surprising since the Fed is still running tight monetary policy.

The Fed revised its growth forecast down and revised its inflation forecast up. The Fed is in a tricky spot; the economy is likely slowing while inflation is proving sticky.

The net result was the median FOMC member forecast of the Fed funds rate at the end of 2025 was unchanged.

Meanwhile, quantitative tightening (the opposite of quantitative easing) was slowed. See the extract below from Bloomberg:

“Beginning in April, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion.”

The Fed's balance sheet is currently at US$6.8 trillion.

The market expects around three cuts to the federal funds rate by year-end with the first cut set to occur in June.

The consensus view is somewhat more cautious, in line with the Fed’s signalling. 

US retail sales remain weak

There was a marginal recovery in US retail sales (month-on-month) relative to December, but the print still surprised to the downside, coming out at 0.1% versus market expectations of a 0.6% rise in retail sales month-on-month. 

That said, real retail and food sales remain slightly above the long-term trend level but have continued on a downward path.

Real personal consumption expenditure is likely to be weak given the retail sales print. The latest year-on-year growth in retail sales of 2.9% suggests that personal consumption expenditure should be around 2.2%. Household consumption makes up around 70% of economic activity in the US.

The market, however, still expects robust economic growth for the US this quarter, despite two months of weak retail sales. The Atlanta Fed GDPNow forecast has recovered slightly but the model still has the US slowing down this quarter. 

The Bank of Japan keeps rates unchanged

The Bank of Japan opted to keep interest rates unchanged at its meeting last week but highlighted potentially improving economic growth, and potentially higher inflation. On inflation, the risks are driven by global dynamics as well as some local government dynamics, specifically less government support for energy.   

There was no material change to market expectations about the Bank of Japan interest rate path this year with just one 25bps (0.25 of a percentage point) hike expected. That said, there are some risks to the upside should inflation surprise to the upside.

US dollar weakness coincides with weaker US markets and improving global markets

US dollar strength at the tail end of 2024 coincided with a period of strong equity returns in the US. The US market rallied as much as 10% from the end of September to the end of January. During the same period, global markets were weaker, with the MSCI World held up by the US, and other markets dragging down performance. This has changed of late, indicative of the role the US dollar exchange rate plays in equity markets.

The MSCI Europe Index stands out over the last three months, up around 15%. Relative to the beginning of 2024, South Africa has outperformed the MSCI Emerging Markets Index, MSCI Asia Index, MSCI Europe and the S&P 500, all in US dollar terms. 

SA inflation remains low

South African consumer inflation in February was 3.2%, unchanged from January and below the consensus forecast of 3.4%. At spot prices, South Africa is due a fuel price cut of around 90c/litre next month. Our updated model forecast is for inflation to remain below the target midpoint range for another seven months. Our forecast trajectory is slightly higher than that of the Reserve Bank’s Monetary Policy Committee (MPC). 

SA sticks with a restrictive monetary policy

At the January MPC meeting, which saw a 25bp cut, the MPC pointed out that it expected inflation to be below 4.5% for the first half of the year but then to revert to 4.5%, with upside risk. It then revised its inflation forecast down in the March meeting, now only expecting inflation to be above 4.5% in the second quarter of next year.

To be fair, forecasting inflation is hard. Inflation in the fourth quarter last year was 180bps (1.8 percentage points) lower than had been expected this time last year.

The MPC mentioned that it considered inflation to be under control and that growth was weak with downside risk. However, one scenario it looked at suggested inflation may spike so it decided to keep rates unchanged. It was an interesting decision, even if it was in line with their prior guidance. Real rates are still near the highest in 20 years and raise the risk of impairing GDP growth while inflation appears not to be a threat at all.

Inflation expectations pose little threat at this point, while the forward rate agreement (FRA) market is pricing in just one more cut by year-end.

Given that inflation is meaningfully below target, and likely to be below for some time, inflation expectations are below target, growth is weak, and real rates are high, and that the MPC decided not to cut, it’s not apparent under which conditions the MPC would cut. The risk for the MPC is that the market begins to assume it has already adopted a shadow inflation target lower than the official target range. 

Finally, the median age of a homebuyer in the US is 56

The median age has been rising for decades from around 30 in the early 1980s. But it has risen sharply in recent years, from around 46 in 2019.