Sanisha Packirisamy, Economist at Momentum Investments 

• The United States (US) Federal Reserve (Fed) pivoted in September 2024 by reducing the Federal funds rate by 50 basis points to a range of between 4.75% and 5%. This follows eight consecutive meetings of keeping interest rates steady in light of inflation concerns.

• Domestic economic growth in the first half of 2024 was weak but growth prospects for the second half of 2024 are cautiously optimistic. This is on the back of improving confidence, easing structural constraints, particularly energy, and the two-pot retirement reform (the impact of the pension reform is built into the South African Reserve Bank’s (SARB) growth and inflation forecasts).

• The SARB left its economic growth estimate for 2024 unchanged at 1.1% and revised growth for the next two years up to 1.6% in 2025 (previously 1.5%) and 1.8% in 2026 (previously 1.7%).

• Risks to the economic growth trajectory were assessed as balanced (unchanged assessment) but the assessment of inflation risks was improved to balanced (previously assessed risks as being to the upside).

• Inflation forecasts have once again improved. Headline inflation is expected to remain around the mid-point of the inflation target (4.5%) over the forecast period at 4.6% in 2024 (previously 4.9%), 4% in 2025 (previously 4.4%) and 4.4% in 2026 (previously 4.5%).

• Core inflation is estimated to remain slightly below the mid-point at 4.4% in 2024 (previously 4.6%), 4.1% in 2025 (previously 4.4%) and 4.3% in 2026 (previously 4.5%).

• On the back of lower international oil prices and a stronger rand, the SARB revised its fuel inflation forecasts lower. Food inflation was also revised lower and is expected to undershoot 4.5% in most quarters going forward.

• In comparison to our estimates and the Reuters median consensus, the SARB is more pessimistic about growth in 2025 and 2026 but they are more optimistic about the trajectory of headline inflation.

• The decision to reduce the repo rate by 25 basis points to 8% was unanimous and in line with the Reuters median consensus. However, it was revealed that the Monetary Policy Committee members (MPC) had debates about keeping interest rates constant at 8.25% or implementing a larger cut of 50 basis points which would have taken the repo rate down to 7.75%.

• It is widely anticipated that the SARB will continue to reduce interest rates this year and next year as it moves from the current restrictive stance to a more neutral monetary policy stance. The speculation now is centred around the magnitude of the interest rate cuts. In our view, the SARB will deliver another 75 basis points of cuts, in 25 basis points adjustments, by the end of 2025. Our projection is slightly less aggressive than the additional 100 basis points pencilled in by the Reuters median consensus and the forward-rate agreement (FRA) curve. The FRA is also leaning toward a more aggressive 125 basis points additional cuts.

Read the full report here.

ENDS