By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Another MPC cut possible but unlikely
On Thursday, 18 September, the South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) will announce its latest decision on interest rates. We expect it to keep interest rates unchanged, although the July MPC forecast shows that their econometric model anticipates that there will be sufficient space for the committee to lengthen the cutting cycle without much delay. Nevertheless, the forecast is a good storytelling tool and the story is evolving. We deliberate on the outlook below.
The Quarterly Projection Model's (QPM) repo path, reflected in the July MPC forecast, indicates at least one more 25-basis point cut (bp) cut this year and nearly two next year, before rates settle just below 6% in 2027. This contrasts with the May MPC path which had rates settling around 7% over the medium term. The logic that drives the revised outlook is as follows. First, a lower inflation target, unilaterally announced in July, affects the monetary policy stance by lowering the estimated neutral interest rate. A lower neutral rate means interest rates can be reduced without shifting policy from restrictive to accommodative. Second, in line with still restrictive monetary policy, soft headline inflation, as well as stronger central bank credibility and communication, the QPM has embedded responsive inflation expectations that shift towards the new 3% objective with less rigidity than in the past. This is imperative to containing cost passthrough and keeping demand-driven inflation around 3%. Third, the QPM's Taylor rule1 will view a softening inflation outlook as a trigger to lower interest rates, with the acceleration in growth and a closing output gap mitigating the downward pull. As the output gap narrows and inflation is entrenched at 3%, monetary policy should be neutral. Therefore, there would be further space to cut interest rates, towards 5.5%, in the period beyond 2027.
The current consensus is that the MPC could resume the cutting cycle early next year, we think the resumption could be even more delayed to 2H26, but as per usual, timing is difficult to predict. Less disputed is the premise of the delay, which many analysts think will be dictated by rising inflation in 2H25 as well as slow collaborative efforts by the public sector to reduce price growth and assist with managing inflation expectations more efficiently. Furthermore, history teaches us that average expectations have become more dynamic, but price-setters remain laggards in their adaptiveness and the cost pressures that have been absorbed in the post- pandemic period are not helpful. Therefore, we are in the camp that believes that the MPC will want to sufficiently convince itself that expectations are becoming anchored at 3%, not 4.5%, before cutting rates again.
Recent developments suggest that the SARB and National Treasury will likely not be engaged in public rebuttals on this topic and that could be enough to reduce uncertainty and start moving expectations and financial planning. That said, the stream of publicly announced multi-year wage agreements highlight that many economic agents are prepared for above-3% growth in labour costs and it may be difficult to continue absorbing cost pressures for another few years. Ultimately, businesses and households will have to face a restrictive environment - this is what is deemed the sacrifice ratio. What would help is softer imported inflation as well as accelerated structural reforms that increase competition and reduce operating costs.
In a nutshell, most analysts think that the July cut was the last for 2025. The speed of transmission from policy and industrial reforms to price growth expectations will dictate how long it will take the MPC to remove monetary restrictions. We all agree that it will be able to resume the cutting cycle before inflation is anchored at 3%, we just think convincing figures before 2H25 may be difficult to attain.
Week in review
Real GDP grew by 0.6% y/y in 2Q25 (versus our 0.7% forecast), following gains of 0.8% y/y in both 1Q25 and 4Q24. On a seasonally adjusted basis, the economy expanded by 0.8% q/q, outpacing both our and the consensus expectation of 0.5%. Growth was broad-based, with mining, manufacturing, and trade each contributing 0.2ppts, while finance, government, personal services, and agriculture each added 0.1ppt. Household consumption rose 0.8% q/q, total investments rebounded on inventory restocking despite weaker fixed investment, and net exports detracted from growth as exports fell more than imports. We maintain our GDP growth forecast at 1.0% for 2025, gradually rising to 1.4% in 2026 and 1.9% in 2027, supported by low inflation, cumulative interest rate cuts, structural reforms, and sectoral resilience, though global trade uncertainty and weak fixed investment remain headwinds.
The FNB/BER Building Confidence Index continued to move in a narrow range, shedding one index point in 3Q25 and settling at 35 points. The headline number reflects a deterioration in the sentiment of quantity surveyors, while main contractors are less downbeat. Nevertheless, overall sentiment in the sector highlights broad dissatisfaction with operating conditions. Fortunately, building activity recovered from its 2Q25 slump and is now around the long-term average. While activity is likely to continue improving in the near term, a slowdown in pipeline activity suggests that the speed of recovery is normalising.
The current account deficit widened to R82.8 billion in 3Q25, from a downwardly revised deficit of R47.8 billion in 2Q25. As a percentage of GDP, the current account was -1.1% versus -0.6% in the previous quarter. This reflected a narrower trade surplus on goods and services, from R150 billion in 1Q25 to R119 billion in 2Q25, as total export volumes fell while import gains were driven by the price effect. In line with this, SA's terms of trade deteriorated as total import prices outpaced those of exports. The trade surplus on goods and services was 1.6% of GDP versus 2.0% previously. The deficit on the services, income, and transfer account widened, from R258.9 to R259.9 billion, mainly on a wider income account. Elevated precious metal prices, alongside softer oil prices, should provide more support to the terms of trade in 3Q25 but export growth may be patchy given the reimposition of the US reciprocal tariff against SA.
Mining output rose by 4.4% y/y in July, accelerating from 2.5% in June and beating consensus expectations of 3.4%, marking a strong start to 3Q25 after contributing to 2Q25 GDP growth. Seasonally adjusted output also increased by 1.0% m/m, a fifth consecutive monthly gain. Growth was supported by iron ore (12.2% y/y), PGMs (6.2%) and coal (1.4%), though gold (-0.4%) and manganese (-3.3%) declined. Year-to-date output is down 1.9%, reflecting earlier weakness in PGMs, gold and coal, suggesting full- year output could still contract by close to 1%, despite recent momentum.
Manufacturing output fell by 0.7% y/y in July, following a 1.9% increase in June and coming in weaker than Bloomberg consensus of a 0.5% decline. Seasonally adjusted output also slipped 0.5% m/m, reversing June's 0.4% gain. The annual decline was driven by weaker production in basic iron and steel (-3.3% y/y), wood and wood products (-1.8%), and motor vehicles and parts (-1.1%), while food and beverages grew 1.9% and petroleum-related products were flat (0%). Year-to-date, manufacturing output is down 1.7%, and the PMI signals that July's weakness may extend into August, posing downside risk to GDP momentum.
Week ahead
On Monday, the BER inflation expectations survey results for 3Q25 will be published. The 2Q25 survey showed average expectations across business, trade unions, and analysts slowing to 3.9% in 2025 from 4.4% previously. Expectations for 2026 sit at 4.3%, versus 4.6% previously, while 2027 expectations, which are aligned with the two- year monetary policy implementation horizon, are 4.5%, down from 4.7%. For the five- year-ahead horizon, expectations are 4.4%, down from 4.7% in 1Q25. These downward adjustments highlight the benefits of soft headline inflation, but expectations remain anchored at the 4.5% objective, not the new 3% de facto target. Therefore, further slowing in 3Q25 will be welcomed by the SARB but it will likely not be enough to suggest that economic agents are operating with a 3% target in mind.
On Wednesday, consumer inflation data for August will be released. Consumer inflation lifted to 3.5% y/y in July, up from 3.0% in June. Monthly pressure was 0.9%, mainly driven by electricity and core items. Core inflation was 0.4% m/m and 3.0% y/y, up from 2.9% previously. Monthly pressure was led by water and other housing services. Electricity inflation was 10.4% m/m and 10.6% y/y. Overall, utilities inflation was 7.6% m/m and 8.0% y/y - outpacing headline inflation. Average fuel prices increased by 2.6% m/m but were still 5.5% lower than in July last year. Food and non-alcoholic beverages (NAB) inflation was 5.7% y/y, up from 5.1% previously, with monthly inflation of 0.6% that was mainly from meat inflation. We see headline inflation remaining flat in August, and while it should continue rising in 2H25, it should remain contained around 4% and average around 3.5% this year.
Also on Wednesday, data on retail sales for July will be released. Retail sales rose by 1.6% y/y in June, after posting 4.3% in May. On a monthly basis, retail volumes were flat, following a 0.2% increase in May, highlighting a continued loss in momentum.
