Big shift in interest rate expectations for South Africa

More economists are shifting their expectations for interest rates in South Africa to a long-term hold, predicting that the South African Reserve Bank will proceed with extreme caution.

The latest group to share this view is Momentum Investments, which believes the SARB will likely put a six-month moratorium on interest rate changes as it assesses the global economic landscape.

This means that an interest rate cut is unlikely in the next three Monetary Policy Committee meetings at least.

The MPC is set to meet again for a review in May 2025, with Momentum expecting another hold, which will likely carry through the July and September meetings as well.

While it remains to be seen whether market conditions will calm down by then, South Africans might only see the SARB shift again in its final meeting for the year in November, if at all.

This is a significant shift away from the projected cutting path seen for South Africa at the start of the year, where another 50 to 75 basis point cuts were on the cards.

At the end of 2024, economists generally viewed South Africa’s cutting cycle as having room for between 125bp and 150bp of cuts.

Between October 2024 and March 2025, the SARB cut interest rates by a cumulative 75 basis points, bringing the policy rate to 7.5%.

However, in the last two MPC meetings (January and March), there were votes in favour of holding rates steady, ultimately remaining unchanged in March 2025.

The SARB’s Quarterly Projection Model currently points to a further 25-basis point cut in the second quarter of 2025, bringing the policy rate in line with the estimated neutral rate of 7.25%.

However, this is likely to remain firmly data-dependent, especially given unusually elevated global uncertainty. As it stands, expectations are that the SARB will vote to hold.

This has been echoed by many other economists, with the most bearish seeing no room for interest rate cuts for the rest of 2025.

Sanisha Packirisamy, Economist at Momentum Investments, said this reflected increased caution amid rising tariff concerns emanating from the United States.

“We expect this cautious stance to persist over the next six months, particularly as some key risks begin to materialise, such as the implementation of a universal tariff by the United States,” she said.

US President Donald Trump announced a universal 10% tariff that took effect from 5 April. The impact of the tariffs is expected to feed through to global economies around the middle of the year.

A far higher and more damaging “reciprocal” tariff was also announced—at 30% for South Africa—but paused for 90 days. If implemented after the pause, its effects will be widely felt in the latter half of the year.

Why the Reserve Bank is likely to hold

Analysing the SARB’s monetary policy review, Packirisamy noted that the SARB is struggling to find stable ground amid rapidly changing economics and their impact on inflation.

On the local front, inflation is projected to bottom at 3.6% in 2025 before gradually accelerating to 4.5% over the forecast period.

While this would typically support the case for further interest rate cuts, the economist said that uncertainty around second-round effects from the VAT increase justifies the SARB’s caution.

This uncertainty is only exacerbated by the SARB missing its previous projections in 2024—before the instability of VAT and Trump tariffs were even a thing.

For inflation, the SARB’s forecasts for 2024 were more pessimistic than reality. It projected an average of 5.0% for the year, but the outcome was more favourable at 4.4%.

Inflation forecast errors were down to a stronger-than-expected rand following the formation of the Government of National Unity and lower oil prices, which eased cost pressures.

“Additionally, unit labour costs were lower than projected, and the output gap turned out to be more negative than initially assumed, both reducing inflationary pressures,” Packirisamy said.

Economic growth, meanwhile, was overestimated by 100%. The SARB projected economic growth of 1.2%, when the actual result was half as much, at 0.6%.

This mismatch was due to the volatile performance of the agriculture sector and overestimations in various other sectors.

On the expenditure side of growth, the SARB persistently overestimated private investment and inventory changes, while net exports were underestimated, mainly due to weaker-than-expected imports.

Packirisamy stressed that these forecast errors were not unique to the SARB, as similar inaccuracies were observed in other analyses, including Reuters consensus.

However, it goes some way to show why the SARB would be cautious about making policy adjustments in 2025 amid even greater levels of uncertainty.

“(The errors) underscore the difficulty of economic forecasting against a highly unpredictable global and domestic landscape,” she said.