Only one more repo rate cut expected in 2025 thanks to Trump policies – economists

Economists expect only one more 25 basis points repo rate cut in 2025 after today’s cut of 25 basis points due to the uncertain global outlook brought about by US president Donald Trump’s policies on trade.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the repo rate cut was expected, but notes that the Monetary Policy Committee (MPC) statement was again hawkish, with the South African Reserve Bank (Sarb) governor stressing the uncertain global outlook.

“Our revised policy rate forecast assumes just one more 25 basis points repo rate cut for 2025, but it is unclear when that might be. It is increasingly plausible that the Sarb would hold rates at its next meeting in March.”

He says the decision to cut the repo rate was in line with expectations, but governor Lesetja Kganyago’s hawkish tone and his emphasis on the uncertain global environment point to fewer rate cuts this year.

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Only four members voted for cutting the repo rate

“In addition, the governor noted that four MPC members voted for a 25 basis points repo rate cut, while two members wanted to keep rates unchanged. Although the committee decided that there was scope to reduce the degree of policy restrictiveness to a more neutral level, all members expressed concern about the implications of the uncertain global outlook.”

Van der Linde says although the Sarb made minimal changes to its short-term economic growth forecasts, only nudging up its 2025 real gross domestic product (GDP) growth forecast to 1.8% from 1.7%, the bank lowered its 2024 growth estimate to 0.7% from 1.1% previously.

“We changed our view on the Sarb’s future policy path slightly, and we now expect only one more 25 basis points repo rate cut in 2025 instead of the cumulative 50 basis points repo rate cuts assumed before.

“The course of policy going forward remains uncertain. Kganyago refrained from committing to any forward guidance, stating that policy decisions will continue to be outlook dependent, responsive to data developments, and sensitive to the balance of risks to the forecast.”

He adds that the US Federal Open Market Committee’s recent decision to pause interest rates might mean that the Sarb will also take its time to adjust its policy stance.

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Lower inflation is slowly making space for lower repo rate

Prof. Raymond Parsons, an economist at the NWU Business School, says the better news on the inflation front is gradually being translated into lower interest rates, modestly easing borrowing costs for businesses and consumers.

“With inflation now expected to converge well within the Sarb’s 3%-6% target range in the period ahead, the recent winding down in the rate of inflation has created the space for the interest rate cutting cycle to continue this year.

“Although future MPC decisions will be outlook dependent, further cuts in borrowing costs this year would nonetheless further underpin consumer and business confidence. Monetary policy is still in restrictive territory, and given the present slow and uneven economic recovery, it needs to be further supported by lower borrowing costs wherever possible.”

FNB CEO Harry Kellan says the latest repo rate decision aligns to the bank’s outlook and anticipation for a 25 basis points cut at each of the next three MPC meetings, which could bring the repo rate to 7% by mid-2025.

“The Sarb took a courageous step to lower interest rates at a time when the world is closely watching for policy shifts by the new government in the US.”

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More repo rate cuts despite upside risks

Mamello Matikinca-Ngwenya, chief economist at FNB, says the confluence of risks from higher local administered price inflation and global trade wars (which would bring higher inflation, a stronger dollar, and tighter Fed policy) versus de-escalated geopolitical tensions and lower oil prices should keep the MPC cautious, but she also expects more repo rate cuts this year.

Frank Blackmore, lead economist at KPMG South Africa, also noted that the governor made it clear that the risks are on the upside in domestic factors regarding administrative prices and public sector wage increases, as well as external factors around the world.

“All the MPC members are concerned about the uncertainty that lies ahead, especially with these external factors that include the new administration in the US and a possible tariff-induced trade war type of situation.

“The governor also discussed their scenario analysis around a trade war, and that obviously would be inflationary and require a higher level of interest rates than what is predicted without that trade war.“

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Repo rate cut encouraging for new home buyers

Dr Andrew Golding, chief executive of the Pam Golding Property group, says the repo rate cut is very encouraging news for aspirant home buyers and those with existing mortgages, particularly as the outlook for interest rate relief has shifted significantly during recent weeks.

“Although this month’s repo rate cut was widely anticipated, the outlook for interest rates for the remainder of the year is far less clear, with opinions ranging from no further interest rate relief to one single cut of 25 basis points. However, the timing of any further rate cut is also debated, with some commentators suggesting March 2025 and others later in the year.

“This would make the current repo rate cutting cycle unusually shallow. This is largely a reflection of the heightened uncertainty in the current global economy amidst concerns of a resurgence in inflationary pressures, which is making many central banks cautious.”

Golding says the stream of executive orders from the US White House is also creating uncertainty, prompting a reassessment of the likely scope for further interest rate cuts in the US, which has shifted from initial expectations of three 25 basis points repo rate cuts to a single cut later this year.

Hannah de Nobrega, economist and quantitative analyst at Prescient Investment Management, says the repo rate cut is in line with market expectations. “The cut can be seen as cautious with a high potential volatility in 2025.

“However, not only is the repo rate cut good for households and businesses, but it is also encouraging for the National Treasury’s focus on growing South Africa’s economy by cutting costs with plans for structural reform in the energy and transport sectors.”

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Likely pause in repo rate cuts ahead

Nicky Weimar, economist at the Nedbank Group economic unit, says the underlying message of today’s MPC meeting is that the inflation and interest rate outlooks are uncertain and face significant upside risks.

“The MPC appears to be setting the stage for a shallow easing cycle and a likely pause in the meetings ahead. Fears of renewed rand weakness against the backdrop of a more hawkish Fed seem to be the main reason for today’s cautious message.

“Since it would probably take time for Trump’s policies to crystalise and even longer for the impact on inflation to emerge, the Fed appears to be a signalling a prolonged pause in US interest rates. This would sustain interest rate differentials in the US’s favour, potentially keeping high-risk emerging market currencies under pressure and thereby reducing the monetary policy space available to their central banks.”

Weimar also thinks that meaningful further rate cuts look increasingly unlikely. “We still expect the Sarb to follow through with another 25 basis points reduction in the repo rate, but it now appears more likely around the middle of the year.”