Good news for interest rate cuts in South Africa

Inflation looks set to stay below the South African Reserve Bank’s target for 2025, which should prove good news for interest rate cuts in South Africa.

CPI inflation in South Africa most recently hit 2.9% in November 2024, which is well below the Reserve Bank’s midpoint target of 4.5%.

Investec Chief Economist Annabel Bishop said that the prices were aided by fuel prices dropping from June.

Petrol price increases were also increasingly more modest over Q2.24, which aided a gradual descent beginning in that quarter.

“However, it should be noted inflationary pressures are generally mild in SA, tending to run below those of last year on the month, and as such, have moderated the outcome for the year to likely below 4.5% y/y, from 5.9% y/y for 2023,” said Bishop.

South Africa is expected to experience low inflation during 2025, with headline inflation still below 4.5% midpoint of the target band for the year, and currently likely to average near 4.0% y/y.  

Low inflation has been driven by mild fuel prices, with December and January seeing moderate increases.

That said, early data from the CEF shows that fuel prices look set for larger fuel price rises, driven by a marked weakness in the rand against the dollar and increased international product prices this month compared to last month.

Rand weakness generally leads to higher inflation from imported goods and is a threat to South Africa’s overall inflation outcome.  

That said, food price inflation stood at 1.6% in November, which is far below the 14.4% recorded in 2023.

As food is the largest part of the headline inflation figure, lower prices led to a rapid deceleration in inflation in 2024.

Food price inflation overall dropped to 1.6% y/y in the latest print, November, from 7.0% y/y in January, and 14.4% y/y in March 2023.  Consumers have benefited from markedly slowing inflation this year, particularly food costs.

“In general, many categories have seen price inflation slow, on the rand’s strength over 2024, and weak demand as interest rates remained stubbornly high, which have also been instrumental in bringing South Africa’s inflation rate down,” said Bishop.

Expectations of cuts

Bloomberg’s economists previously noted that the reduction in inflation below the Reserve Bank’s 3% to 6% target range has given policymakers scope to continue lowering interest rates in 2025. 

The Reserve Bank cut the repo rate by a cumulative 50 basis points in September and November, with the repo rate now standing at 7.75%.

“The narrowing of the output gap to zero over the central bank’s forecast period through 2027 supports halting cuts soon.”

“In 1Q25, inflation may be sticky in the lower band of the SARB’s 3%-6% target. It may then rise to the 4.5% mid-point by 4Q25 and stay there through 2026.”

“Lower-than-anticipated inflation gives the South African Reserve Bank room to cut rates by 50 basis points to 7.25% by March, close to the neutral rate. It will then pause,” said Bloomberg Economist Yvonne Mhango.

However, SARB Governor Lesetja Kganyago warned that although pricing pressures have eased, Donald Trump’s reelection may cause upside risks to inflation in South Africa.

Read: Businesses in South Africa took a beating in 2024 – but things are looking up