SA MPC Preview: 25 bps Rate Cut on March 20 is Likely, But a Very Close Call Due to Uncertainties
Bottom Line: Taking into account that annual inflation in January stood at 3.2% in January, which is below midpoint of target band of 3% - 6%, we think it is likely that South African Reserve Bank (SARB) will cut the key rate from 7.5% to 7.25% during the MPC scheduled on March 20 as inflation remains well-contained, and core inflation continues to decelerate. The decision is still a very close call considering unpredictable global outlook, trade risks, uncertainty about the national budget and inflation risks, which could limit SARB’s rate-cutting cycle. Our end-year key rate prediction remains 7.0% for 2025.
Figure 1: Policy Rate (%), CPI and Core Inflation (YoY, % Change), January 2023 – February 2025
Source: Continuum Economics
SARB’s MPC will convene on March 20, and the second key rate decision of 2025 will be announced. Another rate cut is likely on muted South African inflation and we now foresee that SARB will reduce the key rate from 7.5% to 7.25%. The decision is still a very close call taking into account that unpredictable global outlook, trade risks, battles over the national budget and inflation risks could limit SARB’s rate-cutting cycle.
First, despite South Africa’s inflation slightly increased to 3.2% YoY in January, it remained well below SARB’s midpoint of target band of 3% - 6%. The fall in the core inflation was notable as it eased to 3.5% in January to the lowest level since February 2022, compared to 3.6% in December, which backs rate cut bets.
Despite inflation remaining moderate, there were some bad news from power cuts (loadshedding), which could ignite inflation in the upcoming months. Eskom announced on March 7 that Stage 3 loadshedding was implemented until March 10, after a Stage 6 power cut on February 23. Energy experts warn that the recent load shedding reminded that rolling blackouts are still a threat since Eskom’s generation capacity remains unreliable and unpredictable.
Another matter of concern is the uncertainty concerning the national budget. February 2025 budget was first rejected due to a proposed 2 percentage point increase in value-added tax (VAT) aimed at financing an increase in non-interest spending. Finance minister Godongwana's revised bid for a more modest VAT increase in his proposed budget was rejected by major political parties.
Additionally, the country is facing increasing global trade risks following the decisions by the Trump administration, which could be critical if the U.S. implements tariffs on imports from South Africa. SARB governor Kganyago recently said that policies being enacted by U.S. president Trump may be inflationary and threaten to derail future rate cuts. “To the extent that the measures taken are inflationary, it could slow down the disinflation process that central banks had so steadfastly worked on since the great inflation of 2022,” governor indicated. “There is a risk that the reduction in the restrictiveness of monetary policy that we had seen over the past year could then be brought to an abrupt halt”, Kganyago added.
Despite abovementioned concerns, we think SARB will resume rate cuts during the MPC scheduled on March 20 since inflation remains below SARB’s midpoint target of 4.5%. We feel cautious SARB will likely halt cutting cycle in H2, after the expected inflation spike in H2. (Note: We envisage average inflation will hit 4.1% and 4.5% in 2025 and 2026, respectively). Our end-year key rate prediction remains 7.0% for 2025.