Inflation expected to remain steady, but no repo rate cut on Thursday?

While the inflation rate for February is expected to remain steady, economists are not sure that the Reserve Bank will cut the repo rate again on Thursday as geopolitical risks and the looming increase in VAT are among the risks that will need a careful decision.

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says after the hawkish tilt of the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) in January, the BER thinks the Sarb is likely to keep its interest rate unchanged as it remains concerned about the potential upside risks to inflation.

“Furthermore, only time will tell by how much, but the VAT hike(s) will be inflationary. Should actual inflation continue to undershoot, inflation expectations remain well behaved and the US Fed resumes its cutting cycle, the Sarb may be tempted to cut again later this year.”

The US Fed announces its interest rate decision on Wednesday, the day before the Sarb, but IJssel de Schepper says the Sarb is unlikely to make any changes this time. “However, the probability of a rate cut in May is now essentially a coinflip and markets have repriced in about three 25 basis points repo rate cuts this year.”

The BER also expects that the lower-than-expected consumer inflation rate that will be announced on Wednesday will increase the odds of a repo rate cut later this year.

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BER inflation expectations survey

The BER also published its survey on inflation expectations for 2025 that shows that the survey respondents revised their forecast of headline consumer inflation slightly down from 4.5% to 4.3% against the backdrop of a lower reference rate, despite a slight uptick in reported annual inflation between the two survey periods from 2.8% in October to 3.2% in January.

Their expectations for 2026 were unchanged at 4.6%, although they expect a slight increase to 4.7% in 2027. The BER says analysts are more optimistic among the three social groups, expecting inflation of only 3.9% this year, before stabilising at 4.3% in the following two years.

Business people, on the other hand, anticipate a rate of 4.6% this year and 4.8% over the next two years. On the pessimistic side, trade union officials forecast an acceleration from 4.5% in 2025 to 5.0% by 2027.

Asked about inflation over the next five years, the three social groups anticipate an average of 4.7%, marginally above the targeted midpoint and slightly up from 4.6% before.

The BER points out that against a similar backdrop, households also revised their forecast of inflation in the next year down significantly and now expect a rate of 5.7% in the next 12 months, compared to 6.6% during the fourth quarter of last year.

In line with their lower inflation forecast during the first quarter of 2025, the three social groups also lowered their expectations for an increase in salaries and wages in 2025 and expect that wages will on average increase by 4.5% this year, 0.4 percentage points lower than their fourth-quarter forecast. However, they foresee a more substantial increase next year of 4.8%.

The survey respondents expect economic growth of 1.2% in 2025, slightly lower than the 1.5% anticipated during the fourth quarter survey. They forecast economic growth to accelerate very little, reaching only 1.4% in 2026.

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Inflation steady in February but many risks for repo rate

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, forecast inflation to have remained steady at 3.2% in February although they expect that transport costs remained in contraction territory.

They also expect that food inflation will decrease from 1.9% to 1.5%, while miscellaneous items, including health insurance and hospital fees, which were surveyed in February will exert some upward pressure.

Matshego and Nkonki say this week’s MPC meeting is a difficult one to call, as a case can be made for either another cut or a pause of the repo rate. “Domestic inflation and growth dynamics still support further monetary policy easing.

“Although headline inflation ticked up off a low base in January, it remained well below the Sarb’s 4.5% target. Even more compelling, there was no evidence of significant upward traction in any goods and services in the consumer basket.”

The Nedbank economists also say that steady and low core inflation further confirms that underlying price pressures remain contained. “At the same time, the modest gains on the economy’s supply side were consolidated, helping to contain operating costs and providing some space for moderately faster economic growth without triggering disruptions and bottlenecks.

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Benign inflation outlook but what about the repo rate?

“The inflation outlook for the year remains relatively benign. The gentle increase of recent months will likely continue. Even so, we still see the average for the year at a low 4%. If recent fundamentals dominate the discussion, another 25 basis points repo rate cut is likely on the cards.”

However, Matshego and Nkonki point out that the MPC rightly pointed to brewing upside risks to the inflation outlook in January and identified two areas of concern:

• High administrative price inflation, particularly the possibility of another round of hefty increases in electricity tariffs.
• The threat that the Trump administration’s trade policies could trigger a global trade war, leading to higher inflation and interest rates globally while rattling investors and resulting in greater risk aversion in financial markets. “Such an outcome would place the rand under substantial pressure. According to the Sarb’s model, the rand would depreciate to nearly R21 to the US dollar, driving domestic inflation up to 5% and lifting the policy rate to 50 basis points above the Sarb’s baseline.”

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Electricity tariff hike not as bad as feared

The Nedbank economists say both risks have materialised, but perhaps not quite the way the MPC envisioned. Nersa granted Eskom another hefty 12.74% increase for 2025 but slashed the increases for 2026 and 2027 to 5.36% and 6.19% and therefore the price hikes are substantially less than the Sarb assumed in its January forecasts, especially over the medium term.

“The electricity tariff hikes will likely be less damaging than feared. President Trump’s chaotic trade war started with a bewildering barrage of announcements. The US administration followed through on some of its most severe threats but postponed others. The verdict on reciprocal tariffs is scheduled for early April. So far, China, Canada and the European Union have all retaliated against the US.

“Given that the global markets largely dismissed Trump’s tariff threats, the flurry of executive orders jolted and confused investors. Geopolitical tensions intensified. The markets’ fear gauge, the VIX, shot up to levels last seen during the pandemic.

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Trump’s tariff war will affect inflation and repo rate

“US confidence faltered, consumers’ inflation expectations rose sharply, the Atlanta Fed’s NOW forecasts pointed to a shrinking activity over the first two quarters and Fed Chair Jerome Powell confirmed there is no hurry to cut interest rates. The mayhem has a stagflation feel about it.”

Matshego and Nkonki warn that geopolitical tensions and trade wars lead to higher inflation and weaker growth due to falling trade volumes, reduced investment and faltering demand. “The MPC expected these shocks to trigger global risk aversion and bolster the US dollar, placing the rand under strain.

“While it led to a spike in risk aversion, it did not convince investors to stockpile dollars. This may be because the dollar is still trading around historical highs or because the Trump administration’s policies are shaking the markets’ usually unwavering faith in US exceptionalism and its safe-haven qualities.”

Consequently, they say the rand and other emerging markets currencies remained upright amid the turmoil. “It is still early days. The hit could come later and renewed and persistent rand weakness would alter inflation’s trajectory. 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.”

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Inflation expected to remain subdued for first half of 2025

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, expect that inflation for February will increase to 3.3% and remain subdued in the first half of the year before increasing steadily into the second half of the year due to fading positive base effects and some improvement in demand.

“Nevertheless, we currently anticipate that average inflation will be softer than in 2024, recording a figure closer to 4%.”