SA investors eye lower inflation target

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JIMMY MOYAHA: As I said at the top of the show, we are expecting an interest rate decision at the end of this month, July. But alongside that there have been early rumblings that we could be getting more than just that; we could be getting a revision of our inflation targeting from the central bank. We know this has been something that they have wanted to do for the longest time.

We’re going to take a look at this, among other things, with Allan Grey portfolio manager Sean Munsie. Sean, lovely to have you on the show.

Before we look at our local inflation picture perhaps let’s start with the international developments – things that are unavoidable in the form of US tariffs that would also effectively kick in from the 1st of August, around the time of the interest rate decision. How would these tariffs potentially affect what our MPC might be looking at when they look at our inflation conversation?

SEAN MUNSIE: Thanks, Jimmy. I guess it’s a constantly evolving topic.

It’s an interesting one and it’s worth going back a bit to those events of early April when the reciprocal tariffs were first mentioned – the 30% on South Africa, which has been talked about for the 1st of August, together with tariffs that were placed on the majority of the rest of the US’s trading partners – and the sort of disturbances that caused within the markets, both on the equity side and government bonds, as well as on currencies.

What’s been interesting about the announcements of the last week or two and the postponement to the 1st of August is that we haven’t seen that same level of disturbance. Actually the rand has been pretty stable.

So I guess it could be one of these instances where that phrase has become quite popular – about ‘Trump Always Chickening Out’ [Taco] – and that perhaps we will get another postponement at that point in time.

But clearly it’s front of mind for our [Reserve Bank] governor when it comes to that MPC [Monetary Policy Committee] meeting at the end of July.

JIMMY MOYAHA: Ah, the Taco Trade strikes again.

Let’s stick with the governor for a second, Sean, because regardless of what happens with the tariff conversation:

This conversation around inflation-targeting and reducing that targeting from 4-6% to potentially 2-4% has been something that our central bank governor has wanted to do for the longest time.

In fact, since he’s been elected it has been one of his mandates that he intended to pursue.

We are now finally at a point where it is potentially becoming real. We’ve got an inflation well below the 4.5% midpoint at this stage and we are a couple of days – effectively less than two weeks or so – away from that MPC sitting down.

How much of this do you think is going to take up their conversation around the inflation story and what does it mean for consumers?

SEAN MUNSIE: I guess it’s useful to look at the path of the current rate-cutting cycle that began in earnest in September 2024.

We’ve had 100 basis points [cut] since that day, that time. And if you remember, previous rate-cutting cycles have been probably more structured, more routine, whereas this one has actually been not nearly as much forecastable – if you can say that – upward.

I would imagine Trump and the events of Liberation Day on the 2nd of April have played havoc with the MPC discussions.

So I guess what they typically would like to focus on is what monetary policy-setting is globally, and clearly what the US Fed is doing is front of mind.

I don’t think it’s a coincidence that global central banks, including the Sarb [South African Reserve Bank], adopted a bit more of a cautious approach post the events of Liberation Day.

From the US Fed we saw growth expectations being dialled backwards and inflation expectations increasing, and a similar dynamic playing out locally.

I guess the events of May at the last MPC meeting were quite instructive, given a lot of the dynamics, both globally and locally, if you remember clearly all the GNU tensions around the Vat hike, et cetera. A lot of that had sort of dialled down and, given where real rates were and still are versus history, they remain extremely high.

So that sort of gave them the opportunity for that 25 basis point cut.

The end of July meeting probably becomes a bit trickier in the sense that the Trump tariff deadline is on the 1st of August.

And it doesn’t at the moment look like there’s much movement in terms of any deal that’s being struck between SA and the US.

Also I guess the indications are that the US Fed is in no rush to cut either.

Typically and historically the governor and the MPC have found some comfort cutting in line with the US Fed.

JIMMY MOYAHA: Sean, before I let you go, quickly – are we going to get a rate cut or are you expecting a rate cut?

SEAN MUNSIE: For some of those reasons I mentioned I don’t think we might get a rate cut. But I do think if inflation stays benign over the course of the year we are due at least two rate cuts, and there’s a possibility of more in store.

JIMMY MOYAHA: Well, only the central bank of South Africa can give us that good news. Until then we’ll have to keep an eye on what’s developing and see how we make sense of it.

Thank you so much to Sean Munsie, portfolio manager at Allan Gray, for taking us through the expectation around lower inflation and what that means for the economy.