The Week Ahead

Local

The South African Reserve Bank (SARB) in its Monetary Policy Committee (MPC) meeting noted that South Africa's economic output slightly underperformed in the first half of the year but is expected to grow by 0.6% in the upcoming quarters, driven by stable electricity supply and increased consumer spending. Inflation in South Africa eased to a three-year low of 4.4% in August and is expected to stay below 4.5% through 2026.

Consequently, the SARB has reduced the policy rate by 25 basis points to 8% per annum, aiming to sustain lower inflation while balancing economic growth risks.

International

Recent economic indicators in the US have revealed solid expansion, though job gains have slowed and the unemployment rate has increased modestly. While inflation is progressing towards the Committee's 2% target, it remains somewhat elevated. The Federal Reserve Bank, aiming for maximum employment and stable inflation, has grown more confident in achieving these goals and considers risks balanced. Consequently, the target range for the federal funds rate was lowered this last week by 0.5 percentage points to 4.75-5%. Furthermore the Fed is looking to continue to reduce its holdings of Treasuries and mortgage-backed securities and remains committed to adjusting monetary policy as necessary based on incoming data. Most members supported the rate cut, although one member preferred a smaller reduction.

Sterling soared to its highest level in two and a half years against the US dollar after the Bank of England (BoE) held its interest rate steady at 5%, diverging from the Federal Reserve's 0.5% rate cut. The pound climbed above 1.33 USD, its strongest since March 2022, and reached a two-month high against the euro. The BoE's Monetary Policy Committee voted 8 to 1 to maintain the rate, emphasizing a gradual approach to easing due to persistent inflationary pressures. The BoE also continued its balance sheet reduction at £100bn per year. This hawkish stance contrasted with dovish moves by other central banks, boosting the pound’s appeal and yield on 10-year UK bonds. While the pound may continue to strengthen against currencies like the euro, USD, NZD, and CHF, it could face pressure against currencies backed by hawkish central banks like the AUD and JPY. Markets anticipate further 0.25% rate cuts by the BoE in November and December, but a more aggressive reduction could reverse the pound’s gains.

The Bank of Japan (BoJ) decided to leave interest rates unchanged at 0.25% on September 20, following a previous rate hike in July that caused the yen to surge and disrupted global markets. This decision came shortly after the U.S. Federal Reserve cut rates, highlighting the contrasting approaches of the two central banks. The BoJ's policy stasis aligns with its long-term goal of achieving 2% inflation driven by wage increases, a target that remains challenging despite recent inflation data meeting expectations. The BoJ had surprised investors with rate hikes in March and July, contrasting sharply with the Fed's signaling of potential rate cuts, leading to market volatility and fears of a U.S. recession.