Reserve Bank cuts repo rate but no promises for rest of 2025

The South African Reserve Bank (Sarb) has cut the repo rate by 25 basis points, but only four of the six members of the Monetary Policy Committee (MPC) voted for the cut, with two opting to keep the repo rate unchanged.

The committee also spent some time considering the explosive effect of the trade war started by the new US President Donald Trump.

The Sarb Governor, Lesetya Kganyago, announced the MPC’s decision on Thursday afternoon after the US Federal Reserve (Fed) decided on Wednesday to keep interest rates in the US unchanged at 4.25% to 4.50% for the first time since starting its cutting cycle in September. The Fed rolled out its first rate cut since March 2020, saying that inflation remains “elevated”.

Kganyago said the MPC warned at its last meeting that the global environment will become more challenging.” Some of the risks we saw then have since materialised. In particular, the outlook for monetary policy in the United States has changed.

“The space for rate cuts by the US Fed now looks limited, with core inflation still elevated and new inflation risks emerging, such as rising tariffs on trade. It is even possible that US rates could go up again to stabilise inflation.”

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Global growth outside US subdued

The governor said growth outside of the United States is generally more subdued. “The largest economies in Europe had weak economic performance. Germany had two years of contraction and France and the UK have slow growth.

“At the same time, core inflation remains elevated and rate-cut expectations have been pared back, although less than in the US. Meanwhile, China’s economy has been decelerating, with very low inflation and a marked decline in interest rates.”

Kganyago said in these circumstances, the US dollar appreciated strongly and according to some measures reached an all-time high.

Turning to South Africa, he pointed out that the economy contracted in the third quarter. “However, this was mostly due to an unusually large drop in agricultural production, which has limited implications for how we interpret the economy’s underlying growth trend.”

The good news is that the Sarb expects a rebound for economic growth in the fourth quarter, supported by more normal agricultural production, as well as strong household spending, given tailwinds including lower inflation and the two-pot retirement system withdrawals.

“We think this expected rebound in growth will close the output gap, leaving the economy to operate in line with its potential from the current quarter onwards.”

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Reserve Bank expects economic growth to increase

The Sarb also expects potential growth to trend higher over the next few years, with economic growth reaching about 2% by 2027, although this is less than the 3% needed for job creation.

Looking at the composition of output, Kganyago pointed out that mining and manufacturing have underperformed since the start of Covid-19, with output still below pre-pandemic levels. “It is only due to growth in the tertiary sector that the economy is bigger now than it was five years ago.

“Similarly, on the demand side, investment has been depressed since Covid, while household and government spending have been more resilient. As growth picks up, we expect some rebalancing, with a recovery in investment, as well as improvements in the primary and secondary sectors.”

He said the Sarb will monitor the data carefully to assess how closely the economy tracks these projections. The risks to the growth forecast are assessed as balanced.

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Reserve Bank expects inflation to remain aligned to midpoint

Moving to consumer prices, Kganyago said headline inflation averaged 4.4% last year, near the middle of the Sarb’s target range. Inflation slowed to 3% in December, having started the year above 5%, mainly due to favourable goods-price developments, including food inflation reaching 15-year lows, as well as lower fuel costs.

The Sarb expects inflation to remain in the bottom half of its target range through the first half of this year due to these transitory factors but Kganyago pointed out that headline inflation should revert to around 4.5% aided by core inflation which remains at or below the midpoint over the forecast horizon.

He said while the Sarb’s exchange rate assumptions shifted towards a weaker rand, the effects on the inflation forecast were limited, mainly due to other components of inflation coming in below previous projections, lowering the starting point of the forecast.

“Inflation expectations have also now largely aligned with our midpoint objective, according to the most recent survey. The risks to the inflation outlook are assessed to the upside. In the near term, inflation appears well contained.

However, he warned, the medium-term outlook is more uncertain than usual, with material risks from the external environment, while domestic factors, such as administered prices, are also problematic.

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MPC members concerned about global outlook

Against this backdrop, the MPC decided to reduce the repo rate by 25 basis points, Kganyago said. “The MPC ultimately agreed that it was possible to reduce the degree of policy restrictiveness, making the stance somewhat more neutral. However, all members were concerned about the uncertain global outlook.

“The forecast sees rates drifting slightly lower over the next few years, stabilising near 7.25%, but this rate path from the quarterly projection model remains a broad policy guide. The MPC would like to emphasise that its decisions will be made on a meeting-by-meeting basis, with no forward guidance and no pre-commitment to any specific rate path.

“The MPC decisions will continue to be outlook dependent, responsive to data developments and sensitive to the balance of risks to the forecast.”

Kganyago said given the challenging global environment, the MPC spent some time during this meeting reviewing a trade war scenario that featured a universal increase of 10 percentage points in US tariffs, with retaliatory measures by other countries.

“The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets. In response, our model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher, at its peak, relative to the baseline forecasts.”

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Reserve Bank believes answer could lie in accelerated structural reform in SA

The MPC also considered a scenario of accelerated domestic structural reforms. Kganyago said this showed growth picking up gradually, getting to 3% in 2027. Importantly, this scenario also showed lower inflation and lower interest rates in South Africa, demonstrating how structural reforms can reduce the country risk premium and create more monetary policy space.

He said considering the difficulties of the external environment, it remains crucial to sustain domestic reform momentum while protecting macroeconomic stability. “The MPC’s main contribution is to deliver low and stable inflation, with well-anchored inflation expectations. The committee remains vigilant and ready to recalibrate policy as needed.”

Kganyago said additional measures that would improve economic conditions include reaching a prudent public debt level, further repairing and strengthening network industries, lowering administered price inflation and keeping real wage growth in line with productivity gains.