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Economists expect another repo rate cut of 25 basis points next week when the Monetary Policy Committee of the Reserve Bank meets for the first time this year. However, they have trimmed their expectations for more cuts this year.
According to a Reuters poll, the South African Reserve Bank (Sarb) will trim its repo rate next week by a quarter of a percentage point to 7.50% and will do the same in March but then delay its final 25 basis point cut of the cycle to the third quarter.
As US president Donald Trump’s new administration settles into office, the Sarb was expected to ease interest rates gently this year as it awaits clarification on his proposed tariffs and other policies. All 19 economists Reuters surveyed in the past week were unanimous in saying the Sarb would cut its repo rate.
A slim majority in the poll said the central bank would cut by another 25 basis points to 7.25% in March. Reuters says median forecasts show the bank will wait until the third quarter to cut again by 25 basis points, its last expected move this year and through 2027. In a Reuters survey in December, a third cut was expected in May.
Inflation in South Africa increased for the second month in a row in December, but at 3%, it was still below the mid-point of the Sarb’s 3%-6% comfort level. The poll suggested it would average 4.1% this year and quicken to 4.5% next year.
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Jee-A van der Linde, senior economist at Oxford Economics Africa, says December’s inflation print should build the Sarb’s confidence to drop interest rates further at its next meeting. “Our current forecast is for a 25 basis points cut in each of the first three quarters of this year, as we expect the apex bank to pause along the way.
“Still, we concede the growing risk of fewer rate cuts. The highly uncertain external environment means that the Sarb will continue to strike a hawkish note. Next week’s Monetary Policy Committee (MPC) meeting should set the tone for the year ahead.
Koketso Mano, senior economist at FNB, warns that the probability of resilient growth and fewer interest rate cuts in the US will have implications for the rand, but benign local inflation, as the Sarb forecasts, should support a continued interest rate cutting cycle.
“We predict that interest rates will be cut to 7% by the end of the first half of 2025, but there is a risk that we could see less cuts.”
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Johannes Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, say with inflation expected to remain below the Sarb’s 4.5% target and US interest rates already down 100 basis points, they expect the MPC to reduce the repo rate further.
“However, the Sarb will be more cautious due to the uncertain impact of the likely change in US economic policies. We expect the Sarb to cut interest rates by 25 basis points next week, followed by another cut in March, leaving the repo rate and 7.25% and the prime rate at 10.75%.”
Sanisha Packirisamy, chief economist at Momentum Investments Group, says a moderated inflation outlook and stable inflation expectations create an opportunity to lower interest rates from the current restrictive territory.
“Larger interest rate cuts or easing aggressively beyond neutral are nevertheless unlikely given continued upside inflation threats, including administered prices, the oil price due to geopolitical pressures, the local currency, and potential tariffs under a new US administration.”
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Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), warns that the combination of a weaker rand and a higher oil price does not bode well for South Africa’s inflation and interest rate trajectory.
“The fuel price is set to increase for a fourth consecutive month in February. Indeed, as financial markets have started to price fewer rate cuts by the US Fed, traders have now adjusted their expectations to just one 25 basis point cut this year, from three expected earlier.
“While there is an argument to be made that the Sarb could pause in January to see how financial market dynamics play out in the coming weeks and cut in March (or not at all), we believe there still is a window for the bank to move the policy stance closer to neutral in January and for now think that they could cut again in March.”
She says inflation expectations have moved in the right direction (down), and even with the upside from the rand and oil price, the forecast is for inflation to remain around the current 4.5% target. However, she says, there is an increased risk that the Sarb will (over)cautiously keep the repo rate on hold in January and/or March.
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Annabel Bishop, chief economist at Investec, also expects a 25 basis point repo rate cut next week, but none in March. “The interest rate cut cycle is expected to slow this year, after two cuts in quick succession at the end of last year, with the Sarb not expected to ease interest rates again until July at least.”
She points out that expectations for interest rate cuts in the US have moderated, from three 25 basis points cuts to one definite 25 basis points drop, while there is currently just under a 70% chance of a second repo rate cut for this year.
“During the US presidential inauguration, the rand strengthened, reaching R18.48/USD as the US dollar weakened, with Trump highlighting the need to bring inflation down and stimulating economic growth.
“Trump’s economic team has previously discussed the potential for a moderate tariff path, covering only critical imports, as opposed to a sharp universal tariff approach on all imports. While he mentioned taxing other countries via tariffs, specifics were not given, and markets strengthened in relief as risk-off subsided somewhat.
“However, threats of hefty tariff increases on Canada and Mexico to stem illegal immigration persisted.”
Bishop says South Africa’s Forward Rate Agreement (FRA) curve has only priced in around one 25 basis points cut in the repo rate this quarter and has priced in little further but is not a good longer-term predictor of MPC interest rate decisions.
“An end to the US interest rate cut cycle sooner than markets anticipate has seen some recent rand weakness. Fewer interest rate cuts than have been expected are a risk for South Africa, although this will remain dependent on the domestic inflation outlook.”
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