Inflation unchanged, but economists do not expect repo rate cut

Although the inflation rate for February was unchanged at 3.2%, well within the Reserve Bank’s target range, economists do not expect that the bank will move to cut the repo rate on Thurday, mainly due to uncertainty created by economic effect of trade tariffs.

Statistics SA announced the inflation rate for February on Wednesday morning. Jee-A van der Linde, senior economist at Oxford Economics Africa, says the country’s inflation is in a good spot at the moment with the outlook seemingly benign.

However, he says the latest inflation print does not change Oxford Economics Africa’s view that the South African Reserve Bank (Sarb) will not change the repo rate at the upcoming Monetary Policy Committee (MPC) meeting, although MPC voting patterns shifted more hawkish at the January meeting.

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Benign near-term inflation outlook but no repo rate cut for now

“The near-term inflation outlook is benign and our updated forecast for headline CPI is 3.7% in 2025, down from the previous forecast of 4%. Our projections suggest that CPI will trend sideways over the coming months before gradually increasing in the second half of the year.

“Updated inflation expectations for the first half of 2025 show that South Africans anticipate lower inflation this year of 4.3% versus 4.5% previously and continue to expect that inflation will average 4.6% in 2026.”

Van der Linde says the Sarb will welcome lower inflation expectations while remaining mindful of the upward trend in the headline rate. “We believe the Sarb will hold rates steady at 7.5% at the next MPC meeting on Thursday.

“Greater certainty regarding the economic impact of trade tariffs, the resumption of US Fed rate cuts, in addition to low and stable domestic inflation, could encourage the Sarb to loosen policy further later in the year.”

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Headline CPI of 2.9% expected for March

Koketso Mano, senior economist at FNB, says we should continue to see positive base effects keeping a lid on inflation in February. “Therefore, while several infrequent survey outcomes will be featured in the March figures, these should mainly affect monthly inflation compared to a year ago.

“In line with this, we see the possibility of headline inflation posting 2.9% in March. As the year progresses, the fading of base effects, spending growth and a VAT increase should support faster inflation. However, we anticipate that average inflation will be closer to 4% this year, slower than the 4.4% in 2024.”

Mano points out that risks to the outlook include a more turbulent global environment that drives supply chain disruptions and weighs on emerging market currencies, a faster acceleration in local administered price inflation and a faster rebuilding of margin by suppliers.

“Fortunately, inflation expectations remain anchored, with the latest BER survey result for the first quarter of 2025 showing inflation averaging 4.6% across various time horizons. This should allow monetary policy the space to continue to loosen its noose on the economy, shifting more towards a neutral stance by year-end – we see that neutral level at 7.0%.

“We do not think that the next cut will be on Thursday, as global volatility unfolds, but another cut is probable before the end of the first half of the year.”

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Warning that inflation pressures are building

Casey Sprake, economist at Anchor Capital, says while the overall inflation print remains within expectations, inflationary pressures are building. In the first quarter of this year, survey respondents revised their forecast for headline consumer inflation in 2025 downward to 4.3% from 4.5%, but they anticipate a gradual rise to 4.7% by 2027.

Over the next five years, CPI is expected to stabilise at 4.7%, slightly above the Sarb’s preferred midpoint. “Compounding inflationary risks and government’s recent announcement of a 0.5% VAT increase could add further upward pressure on prices, which may weigh on consumer spending and household budgets.

“While inflation remains near the lower bound of Sarb’s target range, keeping the case for a potential rate cut intact, global uncertainties continue to complicate the outlook. At the previous MPC meeting in January, the vote was a tight 4-2 in favour of maintaining rates but given that the governor’s vote carries double the weight, this effectively translated to a precarious 4-3 split.”

Sprake says a single change in stance could easily shift the balance toward keeping rates unchanged at Thursday’s meeting. “As things stand, we believe the Sarb is likely to take a cautious approach, opting to hold the repo rate at 7.50% while closely monitoring external developments and their impact on domestic inflation.”

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Trump’s tariffs expected to contribute to global inflation

Johannes Matimba Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, say they expect CPI to continue to drift higher off a low base in the months ahead with the increase coming from various sources with goods inflation, principally food and fuel, taking the lead.

“On food, the support from global disinflation will fade. The United Nations’ Food and Agriculture Organisation food price index accelerated by 8.2% in February, the highest since August 2022, from 6.3% in January.

“Trump’s tariffs will also contribute to global inflation, which, combined with a weaker exchange rate, will increase imported food inflation. However, the upside in food inflation will partly be contained by easing local structural constraints and healthy summer rains, which will increase crops.”

They expect that weak global demand and ample supply will keep global oil prices in check but that the benefit will be contained by the rand’s weakness. “The rand will likely come under pressure against the US dollar which will be supported by volatile global sentiment due to escalating trade tensions from Trump’s policies.

“Other risks include higher wage growth and electricity tariffs, which could fuel service inflation. Despite the anticipated upward trend, headline and core inflation will remain below or around the Sarb’s 4.5% target for most of the year, with no evidence of significant demand pressure. We forecast headline inflation to average 4% in 2025, down from 4.4% in 2024.”

Khosa and Wimar also expect that the MPC will likely keep interest rates unchanged tomorrow, focusing on the upside risks to the inflation outlook emanating from the threat posed to the rand, sticky global inflation and the increasing likelihood of a prolonged pause in US interest rates.