Great news for interest rates in South Africa

Positive inflation developments in South Africa point to further interest rate cuts in 2025.

The Bureau for Economic Research said that both the consumer and producer price inflation prints for November came in lower than expected.

Consumer price inflation dropped slightly from 2.8% in October to 2.9% in November. However, this is still well below the South African Reserve Bank’s midpoint target of 4.5%, which it anchors its interest rate decisions on.

Food inflation, which makes up a large part of the CPI basket, hit a 14-year low in November.

Stats SA data also showed that annual producer price inflation (final manufacturing) decreased by 0.1% in November 2024, up from the 0.7% decrease in October 2024.

PPI is a leading indicator for consumer inflation, and decreases are good news for customers.

Moreover, the BER’s latest inflation expectation survey showed that analysts, business people and trade union officials, on average, think that consumer inflation will stabilise at the 4.5%-target midpoint in 2024. They foresee it to be around this level from 2024 to 2026.

Even in the next five years, these social foresee inflation practically at the target midpoint of 4.5%.

The survey is commissioned by the South African Reserve Bank, and its Monetary Policy Committee (MPC) uses its data when it makes interest rate decisions.

The one-year-ahead inflation expectations of households also ticked down by 0.3 percentage points (% pts) to 6.6%. Thus, their expectations have drifted relatively sideways this year.

On average, analysts, business people and trade union officials still expect GDP growth of only 1% in 2024 and 1.5% in 2025. South Africa’s GDP figures saw a surprising contraction of 0.3% in Q3 2024.

When it comes to salaries and wages, the three groups now anticipate these to increase by less than 5% this year and next (4.8% and 4.9% respectively).

Interest rate relief

Amidst the cuts in inflation, the BER said that further interest rate cuts remain on the cards for South Africa – for now.

That said, the SARB is unlikely to cut rates by more than 25 basis points at a time.

In financial markets, forward-rate agreements point to a total of 75 basis point cuts over the next 12 months.

This would bring the repo rate to 7.0% the prime rate and the prime lending rate to 10.5%.

Although this is in line with the SARB’s forecast, if the SARB diverts, a total of just 50 basis points seems more likely than 100 basis points, despite the recent positive data.

The SARB has repeatedly noted that it makes interest rate decisions on the future moves of inflation.

Although cuts are expected, the Nedbank Group Economic Unit warned that inflation is expected to increase in 2025 amid higher food and fuel prices.

“Food inflation will rise off a low base, further amplified by the impact of the earlier dry weather. Global disinflation will also slow down,” said Nedbank.

“However, improved domestic operating conditions due to stable electricity supply and further efficiency gains in logistics should help contain input costs and operating expenses, which, together with the
predictions of higher rainfall will partly mitigate the upside.”

Nedbank added oil prices are also set to rise slightly as global demand improves and OPEC extends production, while ongoing conflicts in the Middle East continue to threaten oil prices.

“Meanwhile, the stronger US dollar will likely weigh on the rand and other emerging market currencies,” said Nedbank.

“The dollar will benefit from the expected change in US economic policies under Donald Trump’s administration, which could lead to sticky global inflation and raise the floor on interest rate cuts.”

“On the domestic front, the threat of electricity tariffs and other administered prices rising more than expected and wages outpacing productivity could also exert pressure. We forecast PPI to average around 4% in 2025.”

Read: Bad news for people earning more than R15,000 per month in South Africa