Bank of America (BofA) has revised its monetary policy outlook for SA and now expects two more interest rate cuts this year. The shift comes after a recent research trip to the country.
“[We] keep our 1.2% GDP growth forecast unchanged and watch fiscal risks beyond 21 May when the budget will be released,” said Tatonga Rusike, Sub-Saharan Africa economist at BofA.
Previously anticipating only one cut in July the bank now expects the Reserve Bank to reduce the repo rate on May 29 and July 31.
“We see the policy rate at 7% by the end of July. The risk when it comes to rate cuts is skewed to more rather than less. Inflation is benign and likely to remain so,” Rusike said.
However, the pace of easing may be tempered by political and fiscal developments, he warned.
“A bad budget that increases GNU [government of national unity] risks and a sell-off in SA assets leading to a weaker rand and higher credit spreads” could prompt the Bank to pause in May, Rusike said.
Conversely, “a neutral budget with a GNU majority vote would lead to a positive market reaction, lower yields, a stronger rand, and tighter credit spreads.” That would clear the way for a cut, he said.
Still, Rusike said engagements with the Reserve Bank’s Monetary Policy Committee members during meetings in Washington and SA suggest a cautious stance.
BofA’s 1.2% growth forecast for 2025 is in line with the IMF’s 1% projection and slightly below the Bureau for Economic Research (BER) and Moody’s Ratings, both of which see growth closer to 1.5%.
“We think that first quarter GDP data is likely to be weak: small positive but no contraction. That could make GDP growth bulls downgrade their full-year forecasts,” Rusike said, adding that optimistic forecasts hinge on stronger reform delivery.
During its visit, BofA noted the government’s progress on Operation Vulindlela reforms.
A bad budget that increases GNU risks and a sell-off in SA assets leading to a weaker rand and higher credit spreads” could prompt the Reserve Bank to pause cuts in May.
— Tatonga Rusike, Sub-Saharan Africa economist at BofA.
Nonetheless, the bank expects a “small downward revision” to 1.5-1.6% from the government’s starting point of 1.9% real GDP growth, “which would still underestimate the revenue gap to our 1.2% estimate”.
“If that’s the case, spending cuts would be moderate, and the budget would likely get buy-in from GNU partners. Fiscal hard truths will have to wait for the October midterm review. Markets would probably like a ‘no-increase-in-issuance’ budget,” Rusike said.
Despite notable improvements in electricity supply and the formation of the GNU, high-frequency economic indicators remain subdued.
Manufacturing output — a key driver of GDP at around 12%-13% — declined 0.8% year on year in March. While the contraction is easing from sharper declines of more than 3% in the prior two months, the first quarter saw a 2.3% fall in seasonally adjusted terms, cementing the sector’s downturn.
The mining sector fared worse, with production plummeting 9.6% in February, largely due to collapsing platinum group metals output. Economists expect continued weakness amid soft global demand and challenging base effects. The BER expects a quarter-on-quarter decline in the three months to end-March.
Rusike said a favourable external environment could help the Reserve Bank lower rates without jeopardising price stability.
“We are forecasting low oil prices ($65 a barrel) and an appreciating rand given a weakening dollar. Headline CPI is likely to average 3.6%,” he said.
On trade, BofA expects tariffs imposed by the Trump administration — 31% on SA exports — to be scaled back after the current pause ends on July 9. This view is echoed by the BER, which does not anticipate a full reinstatement of tariffs.
Geopolitical tensions remain a headwind though.
“SA remains at risk following rifts with the US related to geopolitical conflicts (Israel-Hamas and Russia-Ukraine) and local economic empowerment laws. Nevertheless, slower US and China growth will drag global growth down, along with SA,” Rusike said.
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