Weekly Economic Wrap: Repo rate cut and higher PPI

Economic data started coming in during the last week of January, with a repo rate cut as expected and higher PPI on the domestic front, while tech markets took a dive after the unveiling of DeepSeek, a Chinese artificial intelligence startup.

Bianca Botes, director at Citadel Global, says DeepSeek’s announcement of a highly efficient artificial intelligence (AI) model that rivals established players at a fraction of the cost triggered a significant sell-off this week in stocks that directly or indirectly derive revenue from AI and raised questions about the capex spend, which these companies have already invested in AI development and the future recoverability of this spend through fees.

She says what makes DeepSeek’s achievement so disruptive is that the company developed an AI model comparable to industry leaders like ChatGPT but at a fraction of the cost. While US tech giants have been pouring billions into AI development, DeepSeek reportedly spent just $5.6 million on its model.

On the markets, gold rallied 1.8% to fresh record highs, breaking the $2,800/ounce mark, as investors sought safe-haven assets amid market turbulence and continued uncertainty. Crude oil traded around $74.60/barrel, down 0.03%, as concerns over global demand and potential US tariffs offset supply cuts from the expanded Organisation of Petroleum Exporting Countries, OPEC+ and easing geopolitical tensions.

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Rand traded at R18.63/$ on Friday afternoon

Botes says the rand traded at R18.63/$ on Friday afternoon after trading largely sideways on Thursday following Wednesday’s gains as investors assessed the impact of global economic developments on the emerging market currency.

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say the rand fell early in the week as global risk aversion was stoked by a sharp fall in US equity markets, but it has since recovered most of the losses, touching R18.72/$ in late trading on Monday before pulling back on Tuesday.

“The rand has stabilised somewhat over the past two weeks, trading between R18.30-R18.90 against the US dollar. There is an outside chance that the most significant adjustments to Trump’s policies have already occurred, suggesting the rand could continue to trade in a narrowband over the near term.”

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Repo rate cut by 25 basis points

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says while the decrease in the repo rate was expected, there was a slight possibility that the Monetary Policy Committee (MPC) would deem the upside risks to inflation as too steep to further ease policy.

“Indeed, unlike the two previous decisions to cut, which were unanimous, two of the six members wanted to keep the rate unchanged at this meeting. Moreover, from deeming the risks to the inflation forecast to be balanced in the previous two meetings, the South African Reserve Bank (Sarb) said they were seen to be on the upside in January.

“The Sarb was particularly worried about global uncertainties. As usual, the governor did not commit to any forward guidance on rates, saying it takes decisions on a meeting-to-meeting basis. For now, we think there is room for another 25 basis points cut later in the year, but we are not sure if the Sarb sees the space.”

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Challenging repo rate outlook

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say the repo rate outlook is challenging. They note that while the cut highlights the MPC’s comfort with the inflation trajectory over the medium term, the outlook on interest rates is uncertain.

“Tighter monetary policy in the US and upside inflation risks could limit the MPC’s room to manoeuvre. The voting split showed two committee members already willing to pump the brakes on the cutting cycle, and if this is anything to go by, we could have a pause sooner rather than later.”

Matshego and Nkonki also noted that the MPC was clearly worried about the more hawkish tilt in US monetary policy and its likely negative implications for the rand’s future course. “The underlying message 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. Consequently, meaningful further rate cuts look increasingly unlikely, but 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.”

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PPI edges up slightly

Katrien Smuts, economist at the Bureau for Economic Research (BER), says after two months of negative producer price inflation (PPI) changes, PPI inflation reached 0.7% in December. The main contributor to PPI annual inflation in December was the food products, beverages and tobacco products category, which saw a 4.2% increase. PPI slowed to 3% in 2024 from 6.9% in 2023.

Matshego and Nkonki expect producer inflation to increase further in 2025 to average around 3.5% as food and fuel prices rise off a low base.

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say they expect PPI to remain subdued in 2025, supported by stable oil and commodity prices. “However, risks remain, particularly from potential rand depreciation amid a stronger U.S. dollar and global trade uncertainty, which could pressure producer costs.”

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Private sector credit growth slows in December

Meanwhile, private sector credit growth slowed to 3.83% after growth of 4.16% in November, the slowest growth since July 2024, but the 42nd month of positive credit growth in nominal terms. The broadly defined money measure (M3) grew by 6.71% in December, reaching R5 443 464 million.

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say while home-buying activity has shown signs of recovery in recent months, this has not translated into stronger mortgage advances, aligning with their view that there are still remnants of buyer caution in the market, despite improved conditions.

“We expect the improving demand conditions, characterised by lower borrowing costs and continued reform agenda, to support stronger demand and supply of credit in 2025.”

Matshego and Nkonki say they expect credit growth to end 2025 at around 5.5%.

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Business cycle indicator increases in November

The Sarb’s leading business cycle indicator for November rose by 0.6%. Smuts says the increase was due to positive contributions from an acceleration in the six-month smoothed growth rate of vehicle sales and an improvement in the RMB/BER Business Confidence Index.

“The biggest drag was a deceleration in the six-month smoothed growth rate in the real M1 money supply and a decrease in SAS’s US dollar-denominated export commodity price index.”

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say the increase was driven by positive contributions from five of the ten constituent variables, with the largest boost coming from an acceleration in trend growth in new passenger vehicle sales and an improvement in the RMB/BER Business Confidence Index.

“However, the indicator faced headwinds from a slowdown in trend growth in real Money Supply (M1) and a decline in South Africa’s U.S. dollar-denominated export commodity price index. The eighth consecutive month of annual growth aligns with our view of an economic upturn, with growth expected to recover from below 1% over the past two years to nearly 2% in 2025/26.”