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Economists expected that inflation would be between 2.9% and 3% and were surprised that it decreased to 2.7% in March.
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The news that inflation was the lowest in almost five years in March now has consumers wondering if the inflation rate of only 2.7% will move the Reserve Bank to cut the repo rate again when its Monetary Policy Committee (MPC) meets next month.
The South African Reserve Bank (Sarb) has the constitutional mandate to protect the value of the rand by keeping inflation low and steady. It uses interest rates to influence the level of inflation, with National Treasury setting the inflation target in consultation with the Sarb to act as a benchmark to measure price stability.
The Monetary Policy Committee of the Sarb independently makes monetary policy to achieve this target, which is currently between 3 and 6%. Monetary policy is implemented by setting a short-term policy rate called the repo rate, which affects the borrowing costs of the financial sector, which in turn affects the broader economy.
At 2.7%, inflation is now below the lower band of the inflation target of 3%, but economists warn that it is, unfortunately, not the only benchmark the MPC considers when deciding to cut the repo rate. The geopolitical instability in the world, mainly brought about by US President Donald Trump’s tariffs as well as the looming VAT increase on 1 May, must also be considered.
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Jee-A van der Linde, senior economist at Oxford Economics Africa, says the drop in the inflation rate to its lowest print since June 2020 was more than expected.
“Although the average inflation rate of 3% in the first quarter aligns with our forecast, South Africa’s improved inflation outlook warrants a downward revision to our 2025 baseline forecast of 3.8%.
“The current inflation rate outlook suggests that the likely inflationary consequences of a 0.5% increase in VAT should be less than what it would be for economic growth this year. National Treasury’s latest proposals show an expanded list of zero-rated VAT for several food items, which should cushion the impact of a higher VAT rate.”
However, he says, consumers are dissatisfied with South Africa’s near-term economic outlook, with the consumer confidence index falling sharply at the start of 2025, while retail sales contracted in February after a stronger start to the year.
“Consumers’ apparent reluctance to spend presents a risk to the domestic economic growth outlook, as household consumption has been one of the few areas where the domestic economy performed reasonably well.”
Meanwhile, Van der Linde says, the IMF’s updated 2025 real gross domestic product (GDP) forecast of 1.0% is in line with their downwardly revised figures.
“Considering the increasingly uncertain economic environment at home and abroad, we believe the Sarb will keep the repo rate unchanged at its next meeting in May.
“Monetary authorities may feel more comfortable about lowering the repo rate later this year once global volatility settles and if South Africa’s benign inflation outlook holds.”
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Koketso Mano, senior economist at FNB, says the inflation rate was also below the FNB economists’ expectation of 2.9% and the consensus expectation of 3%. “Inflation should remain steady in April before resuming a rising trend in May. We expect inflation to be 2.7% in April as some monthly pressure could show up in food inflation, while fuel price declines continue to contain overall inflationary pressure.”
She believes that the favourable base effects that kept headline inflation around the bottom of the inflation target range should start to fade at around the turn of the year. “However, the weak starting point and softer oil prices should support inflation below the midpoint of the inflation target range in 2025, averaging below 4% this year.
“A turbulent global environment and risk aversion will likely continue to weigh on the rand and place some upward pressure on imported inflation. An implementation of the VAT increase would have a marginal impact on inflation.”
Mano expects the MPC to consider delaying the resumption of the repo rate cutting cycle as global headwinds unfold.
“At this stage, we see higher odds of a premature end to the cutting cycle should developments prove unfavourable, but the Sarb sees scenarios where interest rates must
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Busisiwe Nkonki and Johannes Khosa, economists at the Nedbank Group Economic Unit, expect inflation to remain contained, rising slowly off a low base as the risks to the outlook appear relatively balanced.
However, they point out that the global landscape remains unsettled, as the exact scale of US tariffs and countermeasures by its trade partners is still unknown. “These uncertainties have led to significant volatility and unexpected twists in the foreign exchange markets, with the US dollar coming under broad-based pressure in recent weeks, which helped to contain the rand’s slide against the trade-weighted basket of currencies.
“The rand is currently trading around R18.55 against the US dollar, still marginally stronger than the range around the same time last year. We expect the rand to remain range-bound, exerting only mild upward pressure on inflation in the months ahead.”
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However, they expect that the VAT increase, the 12.74% increase in electricity tariffs and a modest increase in food prices from very low levels will also add to inflation. “As far as food is concerned, the boost to domestic production from good rains should help counter the impact of higher global food prices and a weaker rand.”
They forecast that food inflation will rise slowly from 2.2% in March to about 4.3% by year-end, still below the Sarb’s 4.5% target. Nkonki and Khosa expect that these pressures will be kept in check by lower global oil prices, patchy domestic demand and somewhat lower operating costs due to easing infrastructure constraints.
“Altogether, inflation’s most likely trajectory appears quite tame. Given today’s better-than-expected outcome, we have revised our inflation forecast for 2025 lower from an average of 3.9% to 3.6%, before climbing to an unchanged 4.5% in 2026.”
They say the MPC will now have to weigh the benign inflation outlook against the potential upside risks that could emanate from the highly volatile and uncertain global environment. “While they may prefer to wait-and-see how global conditions evolve, there appears to be space for another rate cut if the rand holds at current levels.”
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Dr Elna Moolman, head of South Africa macroeconomic research at the Standard Bank Group, was also surprised by the drop in inflation. “Inflation pressure generally remains quite benign and this vindicates the Sarb’s decisions to cut interest rates since late last year, but it does not necessarily remove all of the Sarb’s potential concerns around medium-term upside pressure on inflation from the global tariff developments and a weaker currency.”
Kristof Kruger, senior fixed income trader at Prescient Securities, says the inflation rate in April will be critical. “If it confirms this trend, the Sarb could begin cutting the repo rate by November, with markets already pricing a 50 to 75 basis points cycle. The main constraint remains the rand’s vulnerability, and any sharp selloff could complicate the outlook.
“The inflation rate for March has changed the tone. With inflation now comfortably below target and markets responding accordingly, a window opened for the Sarb to start cutting the repo rate. Positioning for a shallow cutting cycle, especially in the front-end and belly of the curve, looks increasingly justified.”
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