This week is significant for monetary policy, as the Reserve Bank will announce its latest decision on interest rates on Thursday.
After the Bank’s hawkish shift in January, and with key inflation data for February set to be released this week, the market is closely monitoring signals of the central bank’s next move.
Other notable releases include the BER inflation expectations survey on Monday, January retail sales data and the consumer inflation print for February, which will serve as key inputs in the Bank’s decision.
The monetary policy committee’s (MPC’s) meeting on Wednesday and Thursday presents a tough call, with a case to be made for a rate cut or a pause, according to Nedbank economists.
This means interest rates will either remain at 7.5% or be cut by 25 basis points (bps), according to Nedbank. However, they are leaning towards the MPC holding rates on Thursday.
“Domestic inflation and growth dynamics still support further monetary policy easing,” Nedbank said, pointing out that while headline inflation ticked up slightly in January, it remains well below the Bank’s 4.5% target.
“Even more compelling, there was no evidence of significant upward traction in any goods and services within the consumer basket. Steady and low core inflation further confirms that underlying price pressures remain contained,” the economists said.
However there are upside risks, which the MPC flagged in January. These include high administrative price inflation, particularly the potential for further electricity tariff hikes, and a global trade war, particularly tariffs imposed by the US that could disrupt global supply chains and increase inflationary pressures.
Nedbank said these risks have started to materialise, but not quite as expected.
“The National Energy Regulator of SA granted Eskom another hefty 12.74% increase for 2025, but slashed the increases for 2026 and 2027 to 5.36% and 6.19%, respectively.”
This means that the electricity price hikes are likely to be less damaging than previously feared.
Meanwhile, the US trade war scenario remains volatile. President Donald Trump’s policies have shaken markets, but global investors have not yet flocked to the US dollar as a safe haven, meaning that the rand has remained relatively stable.
However, should the situation worsen and the rand weaken persistently, it could alter the inflation trajectory and force the Bank to hold rates steady.
“Given the unfolding trade war and widespread confusion, it may be wise to wait and see, and leave interest rates unchanged for now. We think the MPC will choose this path [on] Thursday,” Nedbank said.
The MPC meeting on Wednesday and Thursday presents a tough call, with a case to be made for both a rate cut and a pause.
— Nedbank economists
BER chief economist Lisette IJssel de Schepper also believes the Bank will keep rates unchanged.
“Following the hawkish tilt in January, we think the Reserve Bank is likely to keep its interest rate unchanged … as the Bank likely remains highly concerned about the potential upside risks to inflation.”
She also warned the VAT hikes tabled in the latest budget would be inflationary, and their full impact is yet to be seen.
“Should actual inflation continue to undershoot, inflation expectations remain well behaved, and the US Fed [Federal Reserve] resumes its cutting cycle, the Reserve Bank may be tempted to cut again later this year.”
The consumer inflation print for February, due on Wednesday, will be an important input for the Bank’s rate decision. According to the BER, inflation is expected to rise from 3.2% to about 3.7%, with a steep month-on-month increase.
“A big reason for the steep monthly uptick is that medical aids were surveyed in February, and this should increase by about 11% year on year — in line with announced premium increases — which bumps up the monthly increase above 1%,” IJssel de Schepper said.
The Nedbank economists expected inflation to remain steady at 3.2%, with some upward pressure from medical and transport costs, but a smaller drop in fuel prices limiting the impact.
Also on Wednesday, Stats SA will release January retail sales data, which will provide insight into consumer spending trends at the start of 2025.
Nedbank expects retail sales growth to have slowed to 1.4% year on year, down from 3.1% in December, due to the usual post-holiday dip.
“Nonetheless, sales are still up due to an improvement in consumer demand,” they noted, adding that consumer spending was being supported by lower inflation, reduced interest rates and withdrawals from the two-pot retirement system.
On the international front, the Fed is set to announce its interest rate decision on Wednesday, but no changes are expected. “The probability of a rate cut in May is now essentially a coin flip, and markets have repriced in about three 25 bps rate cuts this year,” IJssel de Schepper said of the Fed.
Recent lower-than-expected US inflation data has improved the odds of a rate cut later this year, which could provide some relief for emerging markets, including SA.
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