First, a sustained period of rand stability<\/strong> would go a long way towards anchoring actual inflation and inflation expectations at a suitably low level in South Africa\u2019s small, open economy, Kamp said.<\/p>\n\n\n\n “Considering this, it will be important for the government to continue with economic reforms, while pursuing prudent monetary and fiscal policies, following the election,” he said.<\/p>\n\n\n\n Second, it would be helpful if the US Federal Reserve cut its policy interest rate significantly<\/strong>, he noted.<\/p>\n\n\n\n “The Fed matters since we benchmark off the US risk-free interest rate. US interest rate hiking cycles are typically associated with weaker currencies and higher interest rates amongst emerging market economies and vice versa.”<\/p>\n\n\n\n Third, and most importantly, domestic inflation must slow towards the mid-point of the Reserve Bank\u2019s inflation target range<\/strong>. <\/p>\n\n\n\n “Ultimately, this is the most important thing, although implicitly, the Reserve Bank does take the weakness of the economy into account, considering the role the output gap plays in its modelling,” Kamp said, adding that it would also help if inflation expectations declined.<\/p>\n\n\n\n “On balance, however, the information at hand suggests interest rate should be cut significantly in response to slowing inflation as we head into 2025<\/strong>, once the Reserve Bank is confident it is on track to meet its inflation target sustainably.”<\/p>\n\n\n\n Other views<\/strong><\/p>\n\n\n\n Expressing similar sentiments around rates, Nedbank economists also anticipate a hold on the repo rate this week, again citing sluggish progress towards the South African Reserve Bank’s 4.5% inflation target.<\/p>\n\n\n\n Additionally, the recent release of the Federal Open Market Committee (FOMC) meeting minutes last week has sparked concerns over stagnant inflation and monetary policy, subsequently impacting the South African rand.<\/p>\n\n\n\n “We expect the MPC to leave the repo rate unchanged at next week’s meeting as inflation’s progress towards the SARB’s 4.5% target remains slow,” they said.<\/p>\n\n\n\n Nedbank said that since March, there’s been mostly positive news. Inflation slightly improved in April to 5.2%. Factors like food and services saw moderation, offsetting fuel price increases. Global disinflation continued, with lower oil prices and better food outlook. <\/p>\n\n\n\n US inflation fell, but the Fed’s hawkish tone led to market concerns about prolonged tight monetary policy.<\/p>\n\n\n\n Additionally, despite some fluctuations, the rand held up well due to improved domestic conditions. <\/p>\n\n\n\n However, “although the stars are slowly aligning, the bar for a rate cut has not been cleared yet<\/strong>. Two months of inflation relief do not constitute a trend,” said Nedbank.<\/p>\n\n\n\n “The MPC would likely prefer more compelling evidence of consistent disinflation before shifting its stance. On this score, we still expect headline inflation’s descent to be frustratingly slow, stalling over the next two months before dipping below 5% in September and ending the year at 4.8%,” added the economists.<\/p>\n\n\n\n
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