The SARB’s worries about global uncertainties suggest that the cutting cycle may be done

THE WEEK IN PERSPECTIVE

Lisette IJssel de Schepper

It was a big week for monetary policy, with several central banks, including the SA Reserve Bank (SARB), easing policy, the ‘biggest’ bank of all (the US Federal Reserve, Fed) keeping rates steady, and the Brazillian Central Bank aggressively hiking its policy rate. Broadly speaking, all decisions were in line with market expectations. With the exception of some temporary blips in yields and the gold price as markets digested Fed Chair Powell’s words while he was still speaking, there was no related market volatility.  That is not to say market developments were uneventful as a slump in the price of tech stocks created quite a stir. On the global data front, both the US and Eurozone GDP for Q4 disappointed relative to expectations – see the international section for more.

The tech-stock slump came as China’s DeepSeek cast doubt on the US’s dominance in the AI field. DeepSeek’s model is significantly less expensive, while its performance is only slightly worse relative to the more expensive developments. On Monday, Nvidia’s market capitalisation alone declined by almost $600 billion—roughly equivalent to Sweden’s annual GDP. The stock prices of chipmakers in Europe and Asia saw some recovery midweek due to strong company earnings data, but Nvidia continued to struggle, pulling US exchanges lower. Analysts argue that the relative cheapness of DeepSeek now forces market participants to reevaluate the longer-term potential of existing AI-related companies. This process may take some time.

The local JSE Alsi closed yesterday 2.1% higher relative to last week Thursday. Meanwhile, the rand shrugged off some earlier losses, to close the week a touch stronger against the dollar and euro. This follows the SARB’s decision to implement a ‘hawkish’ interest rate cut. While the 25bps decrease decline in the repo rate was expected, there was a slight possibility that the Monetary Policy Committee (MPC) would deem the upside risks to inflation as too steep to further ease policy. Indeed, unlike the two previous decisions to cut, which were unanimous, two of the six members wanted to keep the rate unchanged in this meeting. Moreover, from deeming the risks to the inflation forecast to be balanced in the previous two meetings, the SARB said they were seen to be on the upside in January. The SARB was particularly worried about global uncertainties. While the Governor was speaking, Nersa announced electricity tariff increases (see below for the details) that were lower than pencilled in by the SARB (and us) and should not only result in a lower inflation forecast but also remove one of the upside risks. As usual, the Governor did not commit to any forward guidance on rates, saying it takes decisions on a meeting-to-meeting basis. For now, we think there is room for another 25bps cut later in the year, but we are not sure if the SARB sees the space – clients can find our comment here.

With domestic monetary policy, for now, in the rearview mirror, the focus slowly shifts to fiscal policy and the upcoming National Budget, to be tabled on 19 February. There were two important developments on the expenditure front to take note of, both of which risk pushing government expenditure higher. First, the government has tabled a 5.5% wage offer for public sector workers (which is above its budgeted increase), with some other non-financial benefits improvements too. The unions are considering the proposal. The hope is that an agreement can be reached before the Budget. Second, a high court judgement argued that the ‘temporary’ Social Relief of Distress (SRD) grant had become a permanent feature of SA’s social assistance regime. While not accounted for in the Treasury’s long-term forecasts (as it insists it would need a sustainable income source to fund it), we have always assumed that some form of the SRD would become permanent. However, there could be significant implications from the court’s ruling that the affordability of the grant (from a fiscal perspective) cannot be the reason to exclude people who have insufficient means to support themselves. This would increase the number of qualifying recipients from the 10.5 million budgeted for currently to 18.3 million – with an accompanying increase of about R35bn per year to afford that (working with the current R370/month). Treasury said it is studying the judgement.  

On the geopolitical front, tensions between Rwanda’s President Paul Kagame and SA around the continued conflict in the Democratic Republic of Congo (DRC) were in focus. While the conflict in the DRC has persisted for decades, a resurgence in the M23 rebel group and its recent capture of a provincial capital has drawn the world's attention. SA soldiers are part of international missions in the region, and more than a dozen SA soldiers have been killed in recent fighting. While Rwanda denies the allegations, there is little doubt that Kigali supports the M23 rebels in their intensified efforts to seize new territory. The SA government highlighting this point triggered a fiery response from President Kagama this week. For now, SA says that the decision to either pull out or increase military presence in the region lies with the international missions

WEEK AHEAD: FIRST SA DATA FOR JANUARY; JOBS DATA IN THE US

The local data week will kick off with the Absa PMI on Monday, which will give an indication of how the manufacturing sector fared in 2025. The PMI was volatile through most of 2024 (but so was the official production data) and pointed to a loss of momentum in activity towards the end of the year. The hope is that the January PMI reflects some renewed growth, with the same hope for the S&P Global PMI – which tracks activity across the private sector – for release later in the week, which also showed a dip in December. However, it is not easy to pinpoint what could have supported a rebound in January relative to December for the factory sector in particular. More positive, the Naamsa new vehicle sales for January should reflect the recent upward trend seen in the data, although sales to the rental market, which propped up passenger car purchases in the last months of 2024, could have abated somewhat. On Naamsa, it is worth flagging their statement that there was a major revision to the 2024 export data. Following a ”comprehensive data verification exercise”, it was found that the Volkswagen Group underreported its vehicle exports. Revised data shows that total vehicle exports declined by just 2.2% in 2024, compared to the 22.8% decline initially reported.

On the international front, we will see the final S&P Global PMI data for January, as well as the ISM reports for the US and Caixin prints in China (for which there are no flash figures). Following the flurry of interest rate decisions this week, the Bank of England (BoE) has its policy meeting next week. The BoE has been less explicit on forward guidance relative to other central banks, but some further easing is widely expected. On Friday, the US jobs data will take centre stage. As we have mentioned before, with the Fed’s policy path so data-dependent, misses on employment and price data can create significant market volatility as participants adjust their interest rate expectations.

REFORM TRACKER

Roy Havemann

ESKOM: TARIFF APPLICATION DECISION, INTERIM RESULTS AND AUDITOR GENERAL REPORT

The table below summarises the tariff increases applied for by Eskom, and those granted by NERSA. While still hefty, the lower-than-applied for tariff increase will be positive for inflation and consumers, but it will be negative for Eskom. It leaves a gap of R246.6bn in income between what Eskom says it needs and what the regulator says it needs. This does not necessarily translate into a shortfall, as Eskom usually applies for more than it actually needs. We need a new tariff methodology that better balances the need for affordability with the need to protect Eskom’s bottom line. It is likely that Eskom will take this decision on review. 

Eskom also released its interim financial results for the six months leading up to 30 September 2024. It reported an overall profit of R17.8 bn before adjustments and R16.1 bn after. However, this was only due to a R21.5bn profit from transmission. Generation lost R4.3bn and distribution lost R857m. These results are unsurprising but go to the heart of why Eskom is fighting against the complete unbundling of the entity – transmission is the natural monopoly and, over time, will be the ‘crown jewel’ of the group. In comparison to the same period last year, Eskom made a R2bn profit, but for the full previous financial year the utility made a R55bn loss.  

Meanwhile, the Auditor General (AG) briefed the Portfolio Committee on Electricity and Energy on Wednesday. Its findings were clear, noting that “Eskom continued to submit financial statements for audit purposes, which contained material misstatements in multiple account balances and disclosures” and that “the significant internal control deficiencies that resulted in negative audit outcomes for at least the previous five years were not addressed by the accounting authority”. 

The AG further noted the serious flaws with the prepaid meters, highlighting that significant control deficiencies resulted in an inability to determine the full extent of illicit prepaid tokens created. Simply put, weak financial management at Eskom persists. Ongoing improvements to governance—including ensuring that prepaid meters are not open to fraud—will improve financial performance.   

Eskom lost 13.9 terawatt-hours (TWh) of electricity due to theft, leading to a revenue loss of around R23bn. 

IMPROVEMENT IN COAL EXPORTS THROUGH RICHARDS BAY COAL TERMINAL

Tired of waiting for the courts to decide the fate of its private concession at Durban Port’s container terminal 2, which handles almost half of SA’s port traffic, Transnet has moved to invest its own money in upgrading the port’s infrastructure. Though Transnet’s weak half-year results showed that its port and rail operations achieved only a small increase in volumes last year, Richards Bay Coal Terminal (RBCT) announced last week that it had beat its annual export target of 50 million tonnes (Mt) in 2024. CEO Alan Waller credited the Transnet leadership and their new willingness to cooperate with the private sector for the improvement to 52.08Mt. 

The RBCT’s 2025 export target is 55Mt, which Waller believes will be “relatively easy” to achieve given recent improvements. “We have turned the corner,” he told journalists at a briefing. "At 52Mt, we have ended [the year]; there should only be upside.” 

DOMESTIC SECTION

Katrien Smuts

PPI INFLATION EDGES UP SLIGHTLY WHILE CREDIT GROWTH SLOWS

Following two months of negative producer price inflation (PPI) changes, PPI inflation reached 0.7% y-o-y in December. The main contributor to PPI annual inflation in December was the food products, beverages, and tobacco products category, which saw a 4.2% y-o-y increase and contributed 1.2%pts. For 2024, PPI slowed to 3%, from 6.9% in 2023.

Meanwhile, private sector credit growth slowed to 3.83% y-o-y, following a 4.16% y-o-y growth in November. It marks the slowest growth since July 2024, but the 42nd month of positive credit growth (in nominal terms). Meanwhile, the broadly defined money measure (M3) grew by 6.71% in December, reaching R5,443,464 million.

LEADING INDICATOR TICKS UP

The SARB’s leading business cycle indicator for November rose by 0.6%. This was due to positive contributions from an acceleration in the six-month smoothed growth rate of vehicle sales and an improvement in the RMB/BER Business Confidence Index.  The biggest drag was a deceleration in the six-month smoothed growth rate in the real M1 money supply and a decrease in SAS’s US dollar-denominated export commodity price index.

NEW CPI WEIGHTINGS AND CATEGORY ADJUSTMENTS ANNOUNCED BY STATS SA

On Tuesday, Stats SA released the results of its latest Income and Expenditure Survey (IES), conducted from November 2022 to October 2023. One of the survey’s primary objectives was to capture information on household expenditure distribution across various categories. This data is then used to update the weightings of SA’s consumer price index (CPI), the benchmark used to measure consumer inflation. The updated CPI weightings will be implemented with the January 2025 CPI release, scheduled for 19 February.

To align the SA CPI with the International Classification of Individual Consumption by Purpose (COICOP) 2018, a 13th category was introduced by splitting Miscellaneous goods and services into two separate categories: Insurance and financial services and Personal care and miscellaneous services. Other modifications were made to better reflect contemporary consumption patterns. For instance, computers and televisions were moved from the Recreation, sports and culture category to Information and communication. Postal and courier services were transferred from Information and communication to Transport. Parts of the Alcoholic beverages and tobacco category were reallocated to Restaurants and accommodation services. The latter category was also modernised to include traditional accommodation services like hotels and self-catering units, such as those available through Airbnb. Additionally, the CPI base year was updated to December 2024 from December 2021 to better align with international standards.

We will reassess our CPI forecast following the release of the Income and Expenditure Survey (IES) earlier this week and the confirmation of the Eskom tariff increases. We will provide an update in the upcoming Economic Prospects release.

INTERNATIONAL SECTION

Nkosiphindile Shange

US FED PAUSES INTEREST RATE CUTS; WHILE Q4 GROWTH FELL SHORT OF EXPECTATIONS

The Fed hit the brakes on rate cuts. The central bank officials opted to wait for further progress on inflation (which is sticky) and employment (which remains solid) and kept the policy rate between 4.25% and 4.5%. This decision follows a statement made by President Donald Trump in Davos last week that since oil prices are going down, he will demand that interest rates be dropped immediately and that he knows interest rates better than the Fed officials. The Fed cited that they need to be cautious about potential inflationary effects that may come through if the 25% tariffs on Mexico and Canada become effective next month. To quote Powell, “we do not need to be in a hurry.”

Meanwhile, real GDP rose by an annual rate of 2.3% in Q4, down from 3.1% in Q3 and lower than expected. Consumer spending provided the biggest boost to growth, but investment and exports detracted. The Q4 print means that the US economy expanded by 2.8% in 2024, a touch lower than the 2.9% registered in 2023, but still outpacing its advanced economy peers.

Conference Board data showed that the US Consumer Confidence Index fell for a second consecutive month in January, falling to 104.1 from an upwardly revised 109.5 in December. The Reuters poll had indicated a forecast of rising consumer confidence.

ECB CUTS INTEREST RATES BY 25BPS; GROWTH WEAKER THAN FORECAST

Meanwhile, the ECB announced a widely anticipated 25bps rate cut in January. The Eurozone economy remains weak in the near term, and the manufacturing sector continues to contract while the services sector expands. Risks to the growth outlook remain on the downside, with trade tension potentially limiting how exports are expected to support the economy's recovery. Inflation is expected to remain around the 2% target in the near term.

GDP growth in the Eurozone stagnated in Q4, with no change (+0.029% q-o-q) from Q3 when the economy still expanded by 0.1%. This was weaker than expected, with contractions in Ireland, Germany and France outweighing the growth of Portugal, Lithuania, and Spain (of the available countries). Full-year growth was 0.7%.

The German IFO Business Climate Index surprised by rising to 85.1 in January from 84.7 in December 2024 and beating estimates of 84.6. The IFO Current Economic Assessment Index rose to 86.1 in January from 85.1 in December, while the Expectations Index retreated to 84.2 in January from 84.4. We can read these indices as indicating that businesses are more optimistic about current business conditions but remain pessimistic about the improvement in six months' time. However, on the consumer side, the gloomy sentiment remains. The GfK Consumer Sentiment Index fell to -22.4 points for February from a slightly revised -21.4 points for January.

CHINA'S MANUFACTURING SECTOR SHOWS SIGNS OF WEAKNESS

According to the National Bureau of Statistics (NBS), the manufacturing PMI declined by 1 point to 49.1 points in January. New sales orders fell from 51 points in December to 49.2 points in January due to declining Chinese exports. In addition to the struggles in the manufacturing sector, the construction sector also declined significantly to 49.3 points in January from 53.2 points in December. Industrial profits fell by 3.3% in January, following an 11% increase in December, while the state-owned enterprises also reported a 4.6% decline in profits. This data indicated that there was a slowdown in the Chinese economy at the start of the year, following a (reportedly) strong Q4.

CONTACT US

Editor:         Lisette IJssel de Schepper
Tel:              +27 (0)21 808 9755
Email:          lisette@sun.ac.za

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Name: The SARB’s worries about global uncertainties suggest that the cutting cycle may be done

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