Recent US inflation and positive unemployment data have prompted the Federal Reserve (Fed) to initiate a cycle of interest rate cuts. Meanwhile, China’s central bank has announced new measures aimed at bolstering economic growth by reducing borrowing costs and enhancing banks’ lending capabilities. Additionally, starting January 1, 2025, China will gradually increase its retirement age. In South Africa, inflation fell below the midpoint target in August, leading the South African Reserve Bank (SARB) to lower interest rates for the first time since before the pandemic.
US Interest Rate Cut
In September, the Fed reduced interest rates by 50 basis points, marking its first cut in four years and bringing the benchmark rate to a range of 4.75%-5.00%. This decision represents a crucial shift in the Fed’s approach to managing inflation. Fed Chair Jerome Powell stated that “the time has come” for action, allowing the bank to ease its aggressive strategy to cool the economy. He emphasized the importance of keeping unemployment low as inflation subsides.
The headline inflation rate for August was reported at 2.5% year-on-year, the lowest since February 2021. Although this rate is still above the Fed’s target of 2%, Powell expressed confidence that inflation is trending towards this goal. As the labor market shows signs of cooling, the Fed faced increasing pressure to act.
When questioned about whether the Fed was lagging behind other central banks due to weaker job market data, Powell asserted that he did not believe the Fed was behind the curve, stating that the timing of the cut was appropriate.
The Fed had raised rates over 11 consecutive meetings in 2022 and 2023 before maintaining a range of 5.25% to 5.50% for over a year to combat rising prices. Projections from the Fed indicate a possible further cut of 50 basis points by the end of 2024, followed by additional cuts in subsequent years.
China’s Economic Stimulus
China’s central bank has introduced a comprehensive set of measures to revitalize its struggling economy. Governor Pan Gongsheng announced initiatives to reduce borrowing costs and allow banks to increase lending. These steps follow disappointing economic data that raised concerns about the country meeting its 5% growth target for 2024.
At a press conference, Gongsheng mentioned a reduction in the reserve requirement ratios (RRR) for banks, initially decreasing it by half a percentage point, which could free up approximately one trillion yuan (around $142 billion). He hinted at potential further cuts later in the year. Additional measures to support the property market include lowering interest rates on existing mortgages and reducing the minimum down payment for homes to 15%.
China’s real estate sector has faced significant challenges since 2021, with many developers collapsing and leaving a backlog of unsold and unfinished properties. The central bank’s stimulus plan, announced shortly after the US Fed’s rate cut, also aims to support the stock market, leading to a notable rise in share prices in Shanghai and Hong Kong.
Retirement Age Changes in China
China’s government plans to gradually raise the retirement age for the first time since 1950, addressing concerns about an aging population and a shrinking pension fund. Starting January 1, 2025, the retirement age will increase to 63 for men, 55 for women in blue-collar jobs, and 58 for women in white-collar jobs. Early retirement before the statutory age will not be permitted.
Gold Price Surge and Economic Implications in South Africa
Despite a significant rise in gold prices—over 30% in 2024—South Africa has struggled to capitalize on this due to persistent structural issues in its mining sector, such as unreliable power and rising costs. While higher gold prices have helped maintain production levels, the overall output has seen only marginal increases. Increased demand for gold, spurred by economic uncertainty, has led to a rise in interest for Krugerrands, as consumers look to diversify their investments.
Interest Rate Cuts in South Africa
The SARB’s Monetary Policy Committee recently cut the repo rate by 25 basis points to 8%, reducing the prime lending rate to 11.5%. This decision aligns with a global trend of monetary easing following rate cuts by the US Fed and European Central Bank. Economists are divided on whether this will lead to a gradual decrease in rates or a more aggressive approach.
Lower borrowing costs are expected to stimulate economic activity by making loans and mortgages more accessible, particularly benefiting the property sector. However, the SARB’s projections indicate limited future rate cuts, anticipating a terminal rate of 7.17% by 2025, reflecting ongoing inflation concerns.
As inflation eases, South Africa’s headline inflation rate slowed to 4.4% year-on-year in August, down from 4.6% in July—the lowest since April 2021.
Global Economic Overview
Equities in developed markets continued their upward trend, with the MSCI World Index rising 1.83% month-on-month, maintaining only two negative months in the past year. The Fed’s actions significantly boosted investor confidence in September, as early signs of labor market weakness prompted the Fed to ease monetary conditions. Emerging markets also experienced positive sentiment, with the MSCI Emerging Markets Index increasing by 6.72% month-on-month.
In South Africa, equities maintained momentum following recent elections, with the FTSE/JSE All Share Index gaining 4.04% month-on-month. Resource and financial sectors performed well, while industrials saw a slight decline. The bond market also showed positive growth, and the rand appreciated against major currencies.
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