By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
A low conviction call for the upcoming MPC meeting
The Monetary Policy Committee (MPC) will announce its decision on the level of the policy rate on Thursday, 31 July. The decision will be a tight one to call given the volatility and uncertainty that has plagued 2025. The direction of travel appeared less uncertain in January when the MPC delivered its third 25-basis points cut (bps) and continued a cutting cycle that followed a relatively aggressive hiking campaign since the adoption of inflation targeting. However, it became evident at the March meeting that global headwinds would force monetary policy to be more cautious than what has already been tradition. Aside from the impact of South Africa's (SA) comparatively high inflation target and a higher risk premium during times of volatility, pronounced caution is also reflected in the very shallow yet protracted cutting cycle. The data-dependency and interrupted momentum reflected so far, with the MPC resuming the cutting cycle in May, makes predictions for the upcoming meetings challenging. That said, we think there is space for one more cut.
The case for a July cut
While global conditions remain uncertain and local inflation should accelerate in the coming months, as positive base effects fade and food price pressures mount, headline inflation should remain contained around the 4.5% midpoint of the target range. In addition, weak oil prices and a slow recovery in economic activity should arrest the rise in inflation. Furthermore, the dollar's weakness as well as terms of trade gains from higher precious metal prices have so far supported a resilient rand. This would countervail the MPC's fears surrounding global dynamics, choosing instead to support a benign local environment.
The case for a September cut
A contentious global trade environment that could intermittently dampen sentiment, lift the cost of borrowing, and weaken the rand would continue to concern the MPC. The May meeting included scenario analysis of higher tariffs on SA exports to the United States (US), of up to 30% (10% effective). While growth would be softer in this scenario, a weaker rand would push inflation higher, and the repo rate would rise. We do not believe that the impact on inflation is that obvious given that weak economic activity could dampen cost and exchange rate passthrough. Furthermore, cheaper imports from the East will likely contain inflation in various consumer goods such as vehicles. Therefore, we don't expect a complete pivot in the interest rate cycle, but monetary policy would certainly be more cautious. Another scenario presented at the May meeting was a lowering of the inflation target - another factor that could restrain policy easing, especially with inflation set to accelerate in the near term.
Ultimately, we think the MPC will keep rates unchanged at the July meeting, but we would not be surprised if it opted for an earlier move.
Week in review
The leading indicator recorded another setback in May, declining by 1.3%m/m to 111.3 points, following a 0.6% decline in April. On an annual basis, the indicator slid by 0.7%, from a marginal decline of 0.1% in the previous month. The decline was broad-based across nine out of ten components. The largest negative contributors were decreases in the number of residential building plans approved and the volume of domestic orders received in the manufacturing sector, while the increase in SA's US dollar-denominated export commodity price index was the only positive contributor.
Headline inflation was 3.0% y/y in June, up from 2.8% in April and May. Monthly pressure was 0.3%, led by contributions from core items as well as food and non-alcoholic beverages (NAB) inflation. Core inflation was also 0.3% m/m, but slightly weaker on an annual basis, posting 2.9%, down from 3.0% previously. Average fuel prices declined by 0.4% m/m and 11.2% y/y. Food and NAB inflation was 5.1% y/y, up from 4.8% previously, with monthly inflation of 0.7% that was led by meat inflation. We see headline inflation rising to 3.6% in July, as utility and food costs ratchet up and fuel deflation moderates. For the year, we forecast average headline inflation of 3.5%.
Week ahead
On Tuesday, data on Private Sector Credit Extension (PSCE) for June will be released. PSCE growth rose to 5.0% y/y in May, up from 4.6% y/y in April, largely driven by an acceleration in corporate credit growth, which jumped to 6.6% from 5.9%. Household credit growth remained weak at 3.1%, marginally higher than the 3.0% recorded in April.
On Thursday, data on producer inflation for June will be released. Producer inflation eased to 0.1% y/y in May, down from 0.5% y/y in both March and April, and significantly lower than the 18.0% y/y recorded in July 2022. On a monthly basis, producer prices declined by 0.3%. Excluding petroleum-related products, producer inflation stood at 2.3% y/y in May, with prices down by 0.2% m/m. Intermediate producer inflation stood at 6.9% y/y but fell by 0.9% m/m.
Also on Thursday, the trade balance for June will be published. The trade balance recorded a surplus of R21.7 billion in May, reflecting an improvement from a downwardly revised surplus of R13.0 billion in April (previously R14.1 billion). This was driven by a 6.3% m/m increase in exports to R175.7 billion, supported by higher exports of gold, platinum group metals, and citrus fruits. Meanwhile, imports rose by only 1.2% to R154.1 billion, largely due to increased crude oil imports. Year-to-date, the trade balance reflects a surplus of R60.3 billion, slightly below the R63.9 billion recorded over the same period last year. Nonetheless, this remains consistent with our constructive outlook for the current account deficit.
On Friday, the manufacturing PMI for July will be published. The PMI rose by 5.4 points to 48.5 in June, marking the highest monthly increase since September 2024, though it remained in contractionary territory for the eighth consecutive month. Encouragingly, new sales orders surged by 7.8 points, driven mainly by domestic demand, while export volumes stayed low. Business expectations for the next six months held steady at 62.5, supported by easing geopolitical tensions and stable global trade conditions.
Also on Friday, data on new vehicle sales for July will be released. Total new vehicle sales rose by 18.7% y/y in June to 47,294 units, following a 21.7% increase in May. This was driven by the continued robust performance in new passenger car sales, which grew by 21.7% to 32,570 units. Meanwhile, new commercial vehicle sales rose by 12.5% to 14,724 units. Within the commercial segment, light commercial vehicle sales increased by 14.9%, medium commercial vehicles by 24.7%, and heavy commercial vehicles by 40.7%. However, extra-heavy commercial vehicles continued to weaken, declining by 12.3%, while bus sales fell sharply by 43.5%. Year-to-date, total new vehicle sales are up by 13.7%, compared to a 7.0% decline over the same period last year, supported by a sustained and broad-based recovery in both consumer and fleet demand.
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