By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) will announce their decision on interest rates on Thursday, 29 May. After cutting rates by 25bps at each of the three consecutive meetings since September 2024, the MPC decided to leave interest rates unchanged in March - citing an uncertain global backdrop. While the global environment has become less tense, we still believe that persistent policy uncertainty will continue to push monetary authorities to err on the side of caution. That said, there is ample room for further easing given weak domestic fundamentals so it will be interesting to see which way the MPC leans.
Global environment
On the global front, we are in a better position than during the March MPC when United States (US) President Donald Trump's 'liberation day' was looming and we were anticipating the announcement of reciprocal tariffs. While the initial reciprocal tariffs, at 30%, were worse than feared, they have since temporarily subsided to the SARB's risk scenario which incorporated 10% tariffs on SA's exports and the loss of preferential access to US markets. The scenario highlighted the risk of a confidence shock, resulting in a weaker rand as well as higher inflation and interest rates. Fortunately, a faltering outlook for the US economy and mounting fiscal stability concerns have weighed on the dollar - to the benefit of the rand-dollar exchange rate. However, the same uncertainty that kept the MPC cautious in March has not necessarily dissipated. In fact, one could argue that we now have an idea how much higher tariffs on SA could be without a bilateral trade deal or further extension of the pause ahead of the July deadline. While diplomatic efforts by SA's government unfold, the MPC could choose to delay monetary policy moves and cater for any issues around sentiment and capital flows.
Domestic environment
The MPC must also consider domestic issues that could compound the impact on sentiment. A seemingly fractured Government of National Unity (GNU) during the March MPC weighed heavily on the rand and while the budget contention has abated, it has left even less wiggle room for fiscal policy than before. As it stands, weaker economic growth this year and the precarious fiscal trajectory will likely keep any improvement in sovereign ratings and borrowing costs on hold. On the other hand, the removal of the VAT increase and subdued economic activity will support the benign inflation outlook -rendering the current level of real interest rates quite restrictive. This, alongside expectations that the Fed will resume its cutting cycle in 2H25, supports our view that the SARB will cut rates by another 50bps before the current cycle ends. That is the less contentious part, as usual, timing is the issue.
Other factors worth considering
We expect the MPC to keep interest rates unchanged next week. While we think more cuts will come in 2H25, a 25bps cut next week, which is the consensus view, would not be too much of a surprise and would suggest that local fundamentals outweighed external headwinds. The other factor that could keep the MPC on hold is a shift to a lower inflation target. The immediate aim of restrictive policy would be to guide inflation expectations even lower and embed inflation that is currently at the bottom of the inflation target range. Overtime, a lower neutral interest rate as well as less vulnerability to shocks would drive interest rates to lower levels than the historical norm. Ultimately, we still await official statements from National Treasury on the matter and can only assume the status quo prevails.
Week in review
Consumer inflation was 2.8% y/y in April, up from 2.7% in March. Monthly pressure was 0.3%, led by contributions from food and non-alcoholic beverages (NAB) inflation. Core inflation was 0.1% m/m, and 3.0% y/y - flat from the March print. Average fuel prices declined by 3.2% m/m and 13.4% y/y. Food and NAB inflation was 4.0% y/y, up from 2.7% previously, with monthly inflation of 1.3%. We see headline inflation remaining stable in May, at 0.1% m/m and 2.7% y/y. Some monthly pressure on food inflation would continue to be mitigated by fuel price declines. This is while core inflation remains benign. We still foresee muted inflation over the remainder of the year. Despite a rising trend into 2H25, inflation should remain below the target midpoint - supported by soft oil prices, a recovery in the rand's value, and weak economic activity. Headline inflation should average around 3.5% this year, down from 4.4% last year.
Consumer spending slowed sharply in 1Q25, with retail sales rising just 1.5% y/y in March, down from 4.1% in February (revised up from 3.9%). On a monthly basis, sales volumes dipped by 0.2% in March, following a steeper 1.2% drop in February. Overall, retail activity grew just 0.1% q/q in 1Q25, a significant slowdown from the 2.0% growth in the final quarter of 2024. This suggests that household spending is losing momentum, which could weigh on broader economic growth. Despite the March slowdown, retail sales for the first quarter were up 4.1% y/y - the strongest start to a year since 2018. This reflects improved household finances, supported by lower inflation and reduced borrowing costs. However, the sharp deceleration in March points to growing consumer caution, likely due to fading support from once-off large-scale two-pot pension withdrawals, as well as rising uncertainty both at home and abroad. Looking ahead, consumer spending is still expected to drive growth in 2025, but at a slower pace than previously forecast. The outlook is clouded by global trade tensions, local political uncertainty, and weaker local growth, which may weigh on employment.
Week ahead
On Tuesday, the leading business cycle indicator for March will be published. In February, the leading indicator declined by 0.2% m/m, following a 1.0% increase in January. Despite the monthly decline, the leading indicator maintained its annual rise, increasing by 2.4%-marking the 11th consecutive month of annual growth. The monthly decline reflected decreases in seven out of the ten constituent variables. The largest monthly drag came from the fall in the number of building plans approved, as well the decline in trend growth in the number of new passenger vehicles sold.
On Thursday, data on producer inflation for April will be released. Producer inflation remained subdued at 0.5% y/y in March, down from 1.0% in February. On a month-to-month basis, prices rose by 0.6%, slightly above the average increase recorded over the past six months. The muted annual rate primarily reflects ongoing deflation in transport equipment, particularly parts and accessories, and motor vehicles. Petroleum-related products, notably petrol and diesel, have also registered sustained price declines.
On Friday, data on Private Sector Credit Extension (PSCE) for April will be released. In March, PSCE remained subdued despite lower borrowing costs, slowing to 3.5% y/y from 3.7% previously. Household credit continued to lag corporate credit, although it showed a modest improvement, rising from 2.7% to 2.9%. However, it was the deceleration in corporate credit that exerted the most significant drag on overall PSCE growth in March, with 3.9% growth down from 4.5% in the previous month.
On Thursday, data on producer inflation for April will be released. Producer inflation remained subdued at 0.5% y/y in March, down from 1.0% in February. On a month-to-month basis, prices rose by 0.6%, slightly above the average increase recorded over the past six months. The muted annual rate primarily reflects ongoing deflation in transport equipment, particularly parts and accessories, and motor vehicles. Petroleum-related products, notably petrol and diesel, have also registered sustained price declines.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 21 May | SA | CPI % y/y | Apr | 2.8 | 2.7 |
| SA | CPI % m/m | Apr | 0.3 | 0.4 | |
| SA | Retail sales % y/y | Mar | 1.5 | 4.1 | |
| SA | Retail sales % m/m | Mar | -0.2 | -1.2 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 27 May | SA | Leading business cycle indicator % y/y | Mar | -- | 114.2 |
| 29 May | SA | PPI % y/y | Apr | -- | 0.5 |
| SA | PPI % m/m | Apr | -- | 0.6 | |
| SA | SARB interest rate announcement | May | 7.25 | 7.50 | |
| 30 May | SA | Private sector credit extension % y/y | Apr | -- | 3.5 |
| SA | Trade balance Rbn | Apr | 24.8 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 93,135.11 | 0.90% | 3.60% | 17.20% |
| USD/ZAR | 18.01 | -0.10% | -3.30% | -1.40% |
| EUR/ZAR | 20.32 | 0.80% | -4.50% | 2.80% |
| GBP/ZAR | 24.17 | 0.80% | -2.60% | 3.90% |
| Platinum US$/oz. | 1,081.88 | 8.80% | 12.70% | 4.00% |
| Gold US$/oz. | 3,294.52 | 1.70% | -2.50% | 38.50% |
| Brent US$/oz. | 64.44 | -0.10% | -4.40% | -21.30% |
| SA 10 year bond yield | 9.65 | -0.10% | -4.10% | -13.10% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 0.6 | 1.3 | 1.6 | 2.0 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.0 | 2.1 | 2.0 | 2.1 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -3.7 | 1.3 | 2.6 | 3.9 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.4 | 3.5 | 4.3 | 4.4 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.0 | 4.3 | 4.2 | 4.4 |
| Repo rate (year end) %p.a. | 7.00 | 8.25 | 7.75 | 7.00 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 10.50 | 11.75 | 11.25 | 10.50 | 10.50 | 10.50 |
| USD/ZAR (average) | 16.40 | 18.5 | 18.3 | 18.6 | 18.6 | 19.1 |
