Another good sign for interest rates in South Africa

Annual consumer price inflation has increased in South Africa but remains on the lower end of the South African Reserve Bank’s (SARB’s) target range.

Data from Stats SA shows that inflation increased from 3.0% in December 2024 to 3.2% in January 2025. CPI increased by 0.3% month-on-month in January 2025.

The main contributions to the annual inflation rate were:

• housing and utilities (4,5% and contributing 1,1 percentage points);
• food and non-alcoholic beverages (2,3% and contributing 0,4 of a percentage point); and
• restaurants and accommodation services (4,9% and contributing 0,3 of a percentage point)

On an annual basis, goods increased from 1.9% in December 2024 to 2.4% in January, while services decreased from 4.2% to 4.0%.

Despite the overall increase, the low levels of inflation point to further interest rate cuts in the coming months, with the figure at the lower end of the SARB’s 3% to 6% target range.

The SARB’s Monetary Policy Committee (MPC) most recently cut interest rates by 25 basis points, marking the third straight cut. The three cuts resulted in the repo rate dropping to 7.50%.

However, the decision was relatively close. Two of the six members of the MPC voted against a cut amidst fears over the trajectory of inflation.

This comes amidst a tariff war started by US President Donald Trump, which could increase global prices on goods.

A model used by the SARB showed that a universal 10% increase in US tariffs followed by retaliation from other countries would see domestic inflation hit 5.0% and the rand depreciate to R21 to the US dollar.

Despite these concerns, Governor Lesetja Kganyago stated that inflation should remain below the target midpoint of 4.5% in the first half of 2024.

What economists expect

Economists across South Africa are confident that interest rate cuts are still coming in South Africa, even if the number of cuts differs across experts.

Investec Chief Economist Annabel Bishop, Old Mutual Chief Economist Johann Els and FNB Senior Economist Koketso Mano believe the MPC will cut rates by another 50 basis points in 2025.

Mano said that local headline inflation is expected to remain anchored over the medium term, as the still restrictive interest rates keep demand-driven inflation contained.

With another 50 basis points worth of cuts, monetary policy would have a more neutral impact on economic activity as the repo rate drops to 7%.

The timings of the cuts are still up for debate, with Bishop believing that the SARB will play it safe and not cut rates in March following three straight cuts. She expects cuts in July and November.

On the other hand, Efficient Group Chief Economist Dawie Roodt and Standard Bank Chief Economist Goolam Ballim believe that the SARB will only cut interest rates by 25 basis points this year.

Standard Bank believes that there is room for the cut to take place in March. The bank said that local inflation dynamics, including a new basket of goods, should counter global inflationary problems.

Roodt warned that a 25 basis point cut may not even take place if the US issues sanctions against South Africa amidst heightened tensions between the two countries.

The United States has taken exception to the recently signed Expropriation Bill, with Trump signing an executive order stopping aid to South Africa and allowing Afrikaaners to come to the US as refugees.

Nevertheless, Roodt said that inflation and, more importantly, inflation expectations are well anchored, allowing for interest rate cuts despite the risks posed by Trump.