By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) resumed its interest rate cutting cycle at the May meeting this week, reducing interest rates by 25-basis points (bps). This brings the repo rate to 7.25%, 100bps below the peak of the most recent hiking cycle and the lowest level since early 2023. Interestingly, the statement had a dovish tone, which contrasts the previous MPC meeting when medium-term inflation risks were skewed upwards and only two members voted for a cut. This fits with abated uncertainty, given the unfolding diplomatic efforts by the Government of National Unity (GNU) and resolved contentions around the 2025 budget, which has allowed for a tilt towards a focus on the fundamentals. What was also a highlight from the statement is that the debate on lowering SA's inflation target has formally entered the MPC statement.
First, a quick round up of the statement and the baseline forecast. The MPC still views the global backdrop as highly uncertain and largely growth negative. As a result, expectations for trading partner growth have been downgraded. The MPC concedes that global inflation, on the other hand, will be more difficult to predict given that cost-push factors such as tariffs and supply-chain disruptions could raise costs, while demand-pull factors such as weak economic activity could weigh on pricing power. The local landscape is even more subdued, with both growth and inflation projections lowered over the entire forecast horizon. A lower starting point, stronger rand, softer oil prices and the removal of the VAT increase have supported the benign inflation outlook. Risks to both the growth and inflation outlook are viewed as balanced.
The uncertain global and local policy outlook expected to weigh on the rand at the March meeting has since been countered by a stronger recovery in the exchange rate against the dollar, catalysing a reversion to fundamentals. With this risk debilitated, the dovish voting pattern showed an MPC eager to cut interest rates - no one voted for a hold, and one member even voted for a 50bps cut. Despite this, the MPC still entertained a scenario where global trade conditions deteriorate enough to drive a rand blowout while raising inflation and interest rates. However, recent developments around trade agreements and the disputed legitimacy of prevailing tariffs place this fear further back in our minds.
Top of mind, however, is the MPC's assertive push to lower the inflation target. While their desire has been hinted at for some time now, this is the first time the MPC has included a scenario to back-up their view on how this shift could look and the implications thereof. We agree that lower inflation begets lower interest rates, especially when considering how much lower long-term neutral interest rates will be, 5.5% versus 7% currently, and how softer and more stable inflation will increase the efficacy of monetary policy - reducing the need for large swings in interest rates. What we need to be more convinced of is the speed of adjustment in administered price inflation and average inflation expectations. We worry that sticky administered price inflation, which will adjust more meaningfully with structural reform gains, would require pronounced near-term non-admin core disinflation, especially if food disinflation disappoints. This, however, is hidden in the total core inflation projections, and the near-term nominal costs to economic agents is not immediately clear. Relatedly, we worry that embedding average inflation expectations at 3% in about one year may be challenging. This is because the inflation expectations of price and wage setters are traditionally less dynamic and forward-looking than economic and market analysts. They also tend to focus on the inflation of necessities, including administered costs, which are less responsive to restrictive policy.¹
Ultimately, the MPC has committed to keeping this scenario as a feature of future meetings, showing their resolve in formalising this objective. The key message to the man on the street is that while near-term policy will remain restrictive with a lower inflation target, the level of restrictiveness will continue to be reduced and nominal interest rates will decline, not increase. Furthermore, both inflation and interest rates will be lower over the medium term, supporting economic activity and policy stability. The MPC must capture the moment while inflation remains around 3%, and this shift will likely happen soon.
Week in review
The leading indicator increased by 1.1% m/m in March, rebounding from a 0.2% decline in the previous month. This improvement was driven by gains in five of the seven available component time series, which outweighed the declines in the other two components. The most significant positive influences were a faster six-month smoothed growth rate in the real M1 money supply and a rise in the number of approved residential building plans. Conversely, the largest negative influences were slower six-month smoothed growth rates in new passenger vehicle sales and the composite leading business cycle indicator for South Africa's major trading partners.
Producer inflation remained subdued at 0.5% y/y in April, unchanged from the March reading. On a monthly basis, prices rose by 0.5%, slightly lower than the 0.6% recorded in March. Excluding petroleum-related products, producer inflation stood at 2.5% y/y, up from 2.2% in March, with a monthly increase of 0.9%. Food products inflation rose to 4.9% from 4.7%, largely reflecting a sharp rise in meat inflation to 11.0% from 4.6%, as well as a notable increase in oils and fats inflation to 7.7% from 4.7%. Inflation in textiles climbed to 6.8% from 6.0%, while furniture inflation rose to 8.5% from 7.2%. However, continued deflation in fuel, paper products and transport equipment helped keep overall producer inflation contained in April.
Private Sector Credit Extension (PSCE) growth rose to 4.6% y/y in April, up from 3.4% y/y in March, largely driven by an acceleration in corporate credit growth, which increased to 6.0% from 3.9%. Household credit growth was 3.0%, marginally higher than the 2.9% recorded in March. Within corporate credit, growth in general loans and advances rose to 7.4% from 4.3%, overdraft growth climbed to 12.6% from 10.3%, and mortgage advances grew by 6.2%, slightly up from 6.1% in the previous month. Instalment sales credit growth remained stable and above inflation at 5.0%, compared to 5.1% in prior months, while credit card growth declined sharply to 0.6% from 2.5%. In the household segment, general loans and advances and overdrafts remained in contractionary territory, while mortgage advance growth was stable at 2.3%, unchanged from the prior month. Growth in other household credit categories remained above inflation, with instalment sales credit at 6.2% and credit cards at 8.5%.
¹ When the MPC shifted to the de facto midpoint target and inflation expectations were more anchored to 6%, the process of lowering expectations to 4.5% took roughly two years, even when supported by headline and core disinflation.
Week ahead
On Monday, the manufacturing PMI for May will be published. In April, the seasonally adjusted PMI fell by four points to 44.7, marking its sixth consecutive month in contraction. Respondents' comments were notably negative in April, citing weak demand due to global tariffs and local issues, including excessive rains. The index for expected business conditions in six months dropped by 9.4 points to 48.6, falling below 50 for the first time since November 2023. Business activity and new sales orders saw significant declines, with the business activity index down by 8.3 points to 40 and new sales orders down by 12.8 points to 36.1. The employment index also fell by 3.2 points to 42.9, remaining in contraction for 13 months, as local manufacturers faced production declines and layoffs.
Also on Monday, data on new vehicle sales for May will be released. In April, vehicle sales rose by 11.9% y/y to 42 401 units, following a 12.4% increase in March. Year-to-date, vehicle sales are up by 10.8% compared to the same period last year. This reflects a robust 19.6% growth in new passenger car sales, while the performance of new commercial vehicles has been mixed. Sales of light commercial vehicles are down by 6.9%, and extra-heavy commercial vehicles have declined by 13.2%. Meanwhile, medium and heavy commercial vehicles are up by 9.6% and 14.9%, respectively. Bus sales have also edged up modestly by 3.0% on a year-to-date basis.
On Tuesday, Gross Domestic Product (GDP) data for 1Q25 will be released. Real GDP (not seasonally adjusted) grew by 0.9% y/y in 4Q24, up from 0.4% in 3Q24. On a seasonally adjusted (non-annualised) basis, the economy expanded by 0.6% q/q, marking a modest rebound from a 0.1% contraction in 3Q24. Although there is uncertainty surrounding the notoriously volatile agricultural sector, and while it may perform relatively well, high-frequency data from other sectors suggest that the economy weakened in the first three months of this year compared to the last three months of 2024. We pencil in a quarterly GDP contraction of 0.1% (final estimate) for 1Q25, reflecting softer economic activity in higher-weighted sectors such as mining, manufacturing and trade.
On Wednesday, the RMB/BER Business Confidence Index (BCI) for 2Q25 will be published. The BCI flatlined at 45 index points in 1Q25. While the index remained above the long-term average of 43 points and still reflected improvement from the 30 points recorded at the start of 2024, it nevertheless highlighted stalled momentum. In fact, all sectors except new vehicle dealers reported a fall in sentiment, suggesting growing pessimism across sectors.
On Thursday, data on the current account balance for 1Q25 will be published. The current account deficit narrowed again, recording R31.6 billion in 4Q24 from R55.6 billion in 3Q24. As a percentage of GDP, the current account deficit was 0.4%, improving from 0.8% in 3Q24. For 2024, the deficit was 0.6% of GDP, better than 1.6% in 2023. The narrowing of the deficit in 2024 was on account of a wider trade surplus, which doubled from 1.5% of GDP in 2023 to 3.0% in 2024. This is while the services, income, and transfer (SIT) account deficit widened to 3.6% of GDP from 3.1% in 2023. The strength in gold prices and other safe-haven commodities, versus softer oil prices, has remained supportive to SA's terms of trade in the near term. Over the medium term, the unwinding of logistical constraints and stronger trade relations will be important for export growth.
Also on Thursday, data on electricity generated and available for distribution for April will be released. Electricity production increased by 1.1% y/y in March, reflecting a modest acceleration from a 0.2% y/y increase in February and marking the 16th consecutive month of annual increase. Year-to-date, electricity production is up by 2.3% compared to the same period last year. The continued increase in electricity production is consistent with the ongoing energy reforms and improvement in Eskom's operational performance. However, month-on-month output has been declining in recent months, suggesting that momentum is stalling.
On Friday, data on SA's foreign exchange reserves for May will be released. Gross foreign exchange reserves reached a record high of $67.6 billion in April, up from $67.5 billion in March. This increase was primarily due to an increase in gold reserves and SDR holdings. Counteracting these were foreign currency reserves, which fell to $48 billion from $48.6 billion.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 27 May | SA | Leading business cycle indicator % y/y | Mar | 115.4 | 114.1 |
| 29 May | SA | PPI % y/y | Apr | 0.5 | 0.5 |
| SA | PPI % m/m | Apr | 0.5 | 0.6 | |
| SA | SARB interest rate announcement | May | 7.25 | 7.50 | |
| 30 May | SA | Private sector credit extension % y/y | Apr | 4.6 | 3.4 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 2 Jun | SA | Manufacturing PMI | May | -- | 44.7 |
| SA | New vehicle sales % y/y | May | -- | 11.9 | |
| 3 Jun | SA | GDP % y/y | 1Q | -- | 0.9 |
| SA | GDP % q/q, seasonally adjusted | 1Q | -- | 0.6 | |
| 4 Jun | SA | BER Business Confidence Index | 2Q | -- | 45 |
| 5 Jun | SA | Current account balance R billion | 1Q | -- | -31.6 |
| SA | Current account % of GDP | 1Q | -- | -0.4 | |
| SA | Electricity production % y/y | Apr | -- | 1.1 | |
| 6 Jun | SA | Gross foreign exchange reserves $ billion | May | -- | 67.6 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 94,726.12 | 1.70% | 3.70% | 20.60% |
| USD/ZAR | 17.81 | -1.10% | -4.00% | -2.50% |
| EUR/ZAR | 20.25 | -0.30% | -4.20% | 2.00% |
| GBP/ZAR | 24.03 | -0.60% | -3.40% | 3.00% |
| Platinum US$/oz. | 1,086.11 | 0.40% | 10.70% | 2.10% |
| Gold US$/oz. | 3,317.94 | 0.70% | 0.00% | 40.50% |
| Brent US$/oz. | 64.15 | -0.50% | -0.20% | -23.80% |
| SA 10 year bond yield | 9.4 | -2.60% | -3.10% | -17.20% |
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 |
