By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Last rate cut alongside lower inflation objective
The Monetary Policy Committee (MPC) delivered a unanimous 25-basis point (bp) rate cut at its July meeting, bringing the policy rate to 7.00%. We consider this to be the last cut this year, allowing the MPC time to consider the efficacy of restrictive policy in guiding inflation expectations towards 3%. However, policy is only restrictive because the MPC is working with a lower inflation objective. Had the inflation target remained at 4.5%, monetary policy would have been neutral. As actual inflation settles at 3%, interest rates would also be lower.
A roundup of the statement
The statement had few surprises. Global policy uncertainty remains elevated with the deadline for the resumption of reciprocal tariffs imminent. That said, trading partner activity has been resilient, and growth should average just below 3% over the period to 2027. Global policy decisions have not been synchronized, with monetary policy in the United States (US) remaining restrictive, while the Euro Area has shifted to a more neutral stance given weak growth and inflation. Similarly, South Africa's (SA) growth has been disappointing, and looming US tariffs should exacerbate weak sentiment and the soft growth outlook. Even as growth estimates could improve beyond 1Q25, the economy's potential remains low and structural reforms are pivotal.
The growth outlook is assessed as balanced and so is the inflation outlook, which includes a measured uplift in the coming months. A resilient rand, soft oil prices, and contained inflation expectations should support benign inflation. The low inflation starting point is one of the key factors supporting a lower inflation target as it means the policy rate has to do minimal work to guide expectations lower. The other important part is a restrictive policy rate, which keeps core inflation contained close to the 3% objective. Over time, the MPC sees other inflation categories also converging towards 3%, allowing headline inflation to settle sustainably at that rate. As inflation slows, real interest rates would be more restrictive and policy rates would be reduced to a number closer to the nominal neutral interest rate of 5.5%. This process happens gradually, over two years, as expectations and administered price inflation take time to adjust. In line with this, the MPC sees the repo rate below 6% by the end of 2027.
Our take on this statement
This cut highlighted the MPC's ability to focus on local dynamics given the limited impact of global volatility on the rand and by extension, monetary policy. That said, it is likely the last cut given rising inflation in 2H25 and the MPC's desire to lower the inflation target. The MPC has shifted to a lower de facto target, as they did in 2017 when they adjusted the operational target to 4.5%. While they acknowledge the need for compliance by fiscal policy, government price setting, and labour market wage growth, the MPC's forecasts now show a 3% target. Therefore, we await Treasury's formalisation of this shift as a formality rather than a necessity.
Week in review
Private Sector Credit Extension (PSCE) growth remained steady at 5.0% y/y in June. Household credit growth edged up slightly to 3.1% from 3.0%, while overall corporate credit growth eased marginally to 6.6%, down from 6.7% in the previous month. Within the corporate segment, loans and advances rose to 8.1% from 7.9%, supported by stronger growth in mortgages (6.8% vs. 6.0%) and vehicle asset finance (5.7% vs. 5.2%). In the household segment, car finance increased modestly to 6.8% from 6.7%, while mortgage growth remained subdued at 2.2%. General loans turned positive, growing by 0.1% after a 14-month stretch in negative territory. Credit card growth slowed but remained solid at 7.6%, down from 8.2%.
Producer inflation remained subdued at 0.6% y/y in June, reflecting a modest acceleration from 0.1% in May. Monthly pressure was 0.2%, highlighting upward pressure from food prices, mainly meat and meat products, fruits and vegetables, and dairy products, which was partially offset by a decline in fuel prices. Annual inflation accelerations were recorded in food prices (4.0% y/y in June from 3.7% y/y in May), as meat inflation surged to 20.6% y/y, nearly double the 10.5% recorded in May. Fruits and vegetables inflation rose to 4.3% from 3.0% over the same period, while motor vehicle inflation increased to 2.5% from 1.6%. Fuel remained in deflation, with petrol at -14.2% and diesel at -12.2%. Intermediate producer inflation continued to moderate, easing to 5.5% from 6.9%, following its recent peak of 8.5% in February 2025. We expect producer inflation to gradually rise in 2H25 but remain benign, averaging around 1.2% this year.
The trade balance recorded a surplus of R22.0 billion in June, marginally higher than the downwardly revised surplus of R20.0 billion in May (previously R21.7 billion). This was largely driven by exports of R170.7 billion, reflecting a 1.9% monthly decline, and imports of R148.6 billion, which declined by a slightly steeper 3.5%. Year-to-date, the trade balance has accumulated a surplus of R80.2 billion, slightly below the R92.0 billion surplus recorded over the same period last year. This reflects export growth of 0.6% over the period, while imports declined by 0.9%. Within exports, the total export of vehicles, parts, and accessories is down by 3.3% year-to-date, reflecting a sharp 44.5% decline in the value of these goods exported to the US. This shows the impact of the ongoing 25% US tariffs on vehicles and parts. The impact of sector-specific tariffs and the 30% reciprocal tariff, which takes effect today (1 August), is expected to have a material impact on exports to the US. While there is a need for greater export diversification, including increased trade with other African countries, the diplomatic stance taken by the SA government remains important, given the US' significance as a key export destination for SA goods and commodities.
Week ahead
Data on gross foreign exchange reserves for July will be released on Thursday. In June, gross foreign reserves lifted to $68.4 billion up from $68.1 billion in May. The increase in foreign reserves and the international liquidity position was mainly on account of asset price movements and valuation gains. These were countered by a lower gold price and foreign currency payments made on behalf of government.
Also on Thursday, electricity production for June will be released. Electricity production increased by 2.3% y/y in May, accelerating from a 0.1% rise in April. On a seasonally adjusted basis, electricity production grew by 1.5% m/m, following a 0.2% increase in April. Over the three months to May, electricity production recorded a mild contraction of 0.1%, indicating that momentum will need to be sustained in June for the sector to contribute positively to 2Q25 GDP growth.
Tables
