SARB and Fed weigh different factors in making interest rate decisions

Our weekly podcast by Kevin Lings

SARB and Fed weigh different factors in making interest rate decisions

In this podcast, STANLIB’s Chief Economist, Kevin Lings, discusses the South African Reserve Bank (SARB) decision to keep interest rates on hold, despite a surprising slowing of inflation in August to 3.3% y/y from 3.5%. He considers underlying trends in inflation and the dilemma facing the SARB. He also discusses the rationale for the 25 bps cut in the US and the future trajectory for US rates.

The focus areas during the week included

The S&P 500 rose by 1.2%, reaching another record high at the end of the week (SA’s All-Share Index also ended at a record high), helped by the US Federal Reserve’s (Fed) decision to resume cutting interest rates after keeping rates on hold for nine months. Year-to-date the S&P 500 is up 13.3% (in dollars), while the All-Share Index is up 26.2%. Trade developments returned to the headlines after a Friday morning call between US President Donald Trump and Chinese President Xi Jinping. In a social media post following the call, Trump announced that they had reached an agreement on US ownership of the short-form video platform TikTok and had made progress on several other issues, including further trade negotiations between the countries.

The US bond market (especially shorter-dated instruments) had a muted reaction to the Fed’s interest rate decision, possibly because a 25 bps rate cut was already priced in. For example, the two-year bond yield ended the week at 3.57%, largely unchanged from 3.56% at the end of the previous week. In contrast, the 10-year bond yield ended the week up eight bps at 4.14%, reflecting a further steepening of the yield curve. The US yield curve is expected to continue to steepen as the Fed cuts rates further and the US economy starts to reflect improving economic growth in 2026.

The dollar declined by a further 0.3% against the euro, partly in response to the lowering of US interest rates. The dollar has weakened by 2.7% against the euro since end-July 2025 and by a substantial 11.9% since the beginning of the year. This largely explains the relative strength of the rand and other emerging market currencies over the same period. Year-to-date the emerging market currency index has gained 8.4% against the dollar, while the rand is up 8.3%. We expect these trends will persist over the coming months as markets adjust to the likelihood of further cuts in US interest rates.

In August 2025, SA’s headline CPI inflation declined by a surprising 0.1% month-on-month, which was well below market expectations for an increase of 0.2%. This pulled the annual rate of inflation down from 3.5% to 3.3%. The market anticipated that the annual rate of inflation would rise to 3.6%. From October 2024 to August 2025, headline inflation has mostly remained in a narrow range of 2.7% to 3.3% but is still expected to drift higher over the next 12 months. The monthly decline in headline CPI of -0.1% was helped by a range of factors, including a -0.1% contraction in food prices and an -0.8% fall-off in fuel costs. Other notable price declines included a -2% month-on-month drop in the cost of package holidays, a -1.2% fall-off in the cost of accommodation services, and a further -0.6% slump in the cost of household appliances. Core inflation rose by 0.1% m/m in August, with the annual rate of change remaining contained at 3.1%, up slightly from 3% in July. Core inflation has been steady at around 3% in each of the past six months, which is helping the South African Reserve Bank (SARB) to pull inflation expectations lower.

The SARB decided to keep the repo rate (repurchase rate) unchanged at 7% at its Monetary Policy Committee (MPC) meeting. The decision was in line with market expectations. The decision was not unanimous, as two of the six MPC members suggested interest rates should be cut by 25 bps. Since August 2024, the SARB has cut interest rates by a total of 125 bps, taking the repo rate down to its lowest level since December 2022. In explaining its decision to keep rates unchanged, the MPC highlighted that South Africa’s underlying economic growth rate remains modest, with structurally stronger economic growth dependent on much higher investment levels and faster implementation of reforms. Despite this, some cyclical factors, such as a resilient global economy, higher commodity prices, and positive real credit extension have recently supported growth. This prompted the SARB to revise up its 2025 GDP growth forecast to 1.2%, despite a weaker export outlook due to higher US tariffs. The SARB also revised up its inflation forecast, which now appears more realistic.

The US Federal Open Market Committee (FOMC) decided to cut the Federal Funds target interest rate by 25 bps to a range of 4% to 4.25%. This was in line with market expectations and in response to a weaker labour market. The Fed started its interest rate cutting cycle in September 2024 and has cut rates on only four separate occasions, by a total of 125 bps, since then. Only Stephen Miran (very recently appointed to the Fed) dissented at this meeting. He preferred a rate cut of 50 bps. During the FOMC press conference, Fed Chair Jerome Powell highlighted that the risks to the labour market are to the downside, while inflation is expected to move higher (especially goods inflation, off a low base). Powell acknowledged a risk that the impending upward drift in US inflation could become more “persistent”. The updated Summary of Economic Projections (SEP) indicated that the members of the FOMC expect two more rate cuts this year (in October and December) and only one more in 2026. However, the dispersion of interest rate views for 2026 remains extreme, suggesting a lack of confidence in the outlook for the US economy beyond the next 3-6 months.

US weekly jobless claims fell to 231 000 last week, reversing the surge to 264 000 in the preceding week. Continuing claims, a measure of people claiming benefits for multiple weeks, also dipped last week, and at 1.92 million are well below the high of 1.97 million seen earlier this year. Both indicators provide some encouragement that, while hiring remains weak, companies are not cutting back on their workforce for the time being. The Fed has become much more focused on the risks in the labour market, reflected in the fact that Powell highlighted that the weakness in the labour market was a key reason for the Fed’s 25 bps rate cut last week.

US retail sales increased by 0.6% m/m in August, beating market expectations for an increase of 0.2% m/m and suggesting that consumer spending remains resilient, despite a weaker labour market.

The US National Association of Home Builders reported that its Housing Market Index, which gauges the overall sentiment of homebuilders, was 32 index points in September, holding steady from August but falling short of estimates for a modest improvement. Sales expectations for the next six months improved, driven by lower mortgage rates and expectations of additional Fed rate cuts.

The Bank of Japan (BoJ) held interest rates steady at 0.5%, in an environment of domestic political and global trade uncertainty. This was in line with market expectations. However, for the first time in Governor Kazuo Ueda’s tenure, two policymakers dissented, preferring a rate hike. Despite keeping rates on hold, the BoJ continued to indicate that it will raise interest rates if the economy and prices develop in line with its forecasts. Consequently, market sentiment from the central bank meeting was hawkish, especially given the dissent, leaving the door open for a rate hike later this year. The yield on the 10-year Japanese government bond rose to 1.62% from 1.58% at the end of the previous week. In August 2025 Japan’s core inflation rate was 2.7% y/y, in line with market expectations and down from 3.1% in July.

The Bank of England’s (BoE) Monetary Policy Committee voted seven to two to leave the key interest rate unchanged at 4%. This was in line with market expectations. Policymakers also decided to slow the annual pace at which the BoE sells bonds on its balance sheet to £70 billion from £100 billion, partly to minimise the impact of sales on the gilt market, given the increase in long-term bond yields. BoE Governor Andrew Bailey said: “although we expect inflation to return to our 2% target, we’re not out of the woods yet so any future cuts will need to be made gradually and carefully”.

Norges Bank (Norway) reduced its key policy rate by 25 bps to 4%, which is the second rate cut this year. Norway’s central bank reiterated that it aims to lower borrowing costs again, but its rate path forecast indicated that another move is unlikely before the second quarter of 2026.

Industrial production in the Eurozone rebounded in July by a seasonally-adjusted 0.3% m/m, after declining by 0.6% m/m in June. There was an increase in the output of capital goods as well as durable and non-durable goods, despite tariff-related uncertainty.

China’s retail sales grew by 3.4% y/y in August, down from 3.7% y/y in July. The August sales performance was hurt by a slower disbursement of funds from the government’s consumption trade-in programme. This August performance was below market expectations for growth to accelerate to 3.8% y/y (Bloomberg). Overall, underlying domestic demand remains subdued, with sales continuing to track below the historical trend.

China’s industrial production continued to lose momentum in August, slowing to an annual growth rate of 5.2%, which is down from 5.7% in July and the slowest growth since August 2024. The performance of China’s industrial sector was hurt by ongoing weakness in the domestic economic, moderating exports, and the anti-involution push (in the context of the Chinese economy, involution (neijuan) refers to excessive and self-defeating competition to get ahead of others). The August growth rate was below market expectations for growth to slow to 5.6% y/y (Bloomberg).