The South African Reserve Bank’s monetary policy committee (MPC) is expected to announce another repo rate cut of 25 basis points on Thursday despite a slight uptick in inflation in December, economists say.
KPMG lead economist Frank Blackmore said the rand-dollar exchange rate had reduced the positive impact of low oil prices, while most other items were little changed.
“This still gives the Sarb space to reduce rates in 2025. Inflation has come in below target since August 2024, which has created the space for further rate cuts.
“The Sarb has emphasised the risks and will be considering the medium-term impacts of those risks, including the weaker rand, in assessing how many further cuts are to be expected. We still see three cuts of 25 bps taking place over the year, leaving the repo rate around 7%,” Blackmore said.
Broader pressure
While economists have found comfort in the fact that inflation in December was at 3%, governor Lesetja Kganyago told Bloomberg at the World Economic Forum in Davos this week that he was closely monitoring broader inflationary pressures.
To the extent that the [protectionist] measures taken are inflationary, it could slow down the disinflation process that the central banks have so steadfastly worked on
— Lesetja Kganyago, SARB governor
“I think that from an economic perspective, you would expect this [set of inflationary shocks from the US] to be inflationary. There are just too many moving parts though... Two things are of concern. One is that the measures taken could lead to a fragmentation in terms of the global economy and could actually spur other countries to ... take protectionist measures.”
This is in light of threats by US President Donald Trump to impose tariffs on a number of countries, including China, Mexico and Canada.
It's yet not clear what the Trump administration's posture towards South Africa and the African continent will be.
“To the extent that the [protectionist] measures taken are inflationary, it could slow down the disinflation process that the central banks have so steadfastly worked on since the great inflation of 2022 and the risk is then that ... the reduction in the restrictive monetary policy that we had seen over the past year could be brought to an abrupt halt, but there is also a risk that it might be reversed,” Kganyago said.
A fresh hiking cycle could not be taken off the table, but one inflationary shock was easier to “look through” than a multiplicity of shocks.
Rand threat
South Africa was already experiencing an exchange rate impact from the policies proposed by the new US administration, reflecting that while the market views tariffs negatively in terms of inflation, it assumes that the harm to the US will be less than that experienced by other countries.
“It is possible for other policies, such as the renewal of the Agoa trade agreement, to also have a substantial impact on the economy, but until a decision is made we will have to live with that uncertainty.”
PwC South Africa chief economist Lullu Krugel said in a memo that CPI was forecast to average 4.5% in 2025, though the medium-term outlook was uncertain due to upside pressures on the cost of food, electricity, water, insurance and wage settlements.
“Economists expect lower inflation, a decline in interest rates and higher economic growth in 2025 to support better business and investment conditions this year compared to 2024. All of this points to better conditions for consumers as well in terms of their spending power.”
Outlook
Prof Raymond Parsons of the North-West University Business School said the inflation outlook was still positive. In recent months, the rate of inflation had gradually slowed to the SARB’s target range of 3%- 6%.
“Barring shocks, as well as keeping a watchful eye on the vulnerable rand, another cumulative 50 basis points reduction could also still be on the cards this year.”
He said there was room for cuts as economic growth was only about 0.6% last year and is expected to be around 1.7% in 2025.
“Monetary policy is still in restrictive territory and reduced borrowing costs would help to support the slow and uneven economic recovery presently under way.”
He said the protectionist policies announced by the Trump administration created uncertainty for the global inflation and interest rate outlook. Central banks have warned that renewed inflation in the US could trigger higher global rates for a longer period.
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