Economists are divided over whether the Reserve Bank will cut the repo rate or be cautious and keep it unchanged
As inflation ticked up by only 0.1% in April, consumers are wondering if this means that the Reserve Bank will cut the repo rate next week.
Economists have previously said that due to various challenges, an increase will not happen before the second half of the year.
Statistics SA announced this morning that the inflation rate for April increased to 2.8% from 2.7% in March.
The main contributors were housing and utilities (4.4%) and food and non-alcoholic beverages (4.0%), while goods price inflation eased from 2.0% in March to 1.7% in April, while services inflation rose from 3.5% to 3.8%.
Jacques Nel, head: Africa Macro at Oxford Economics Africa, says April’s inflation rate is slightly higher than expected, but no cause for concern.
“Core inflation continued to ease, and indications are that fuel prices will provide further disinflationary impetus in upcoming inflation rate releases. The latest figure is higher than our estimate of 2.6% and the consensus estimate of 2.7%.
“The April print is the first upside inflation surprise after a string of surprises where inflation was lower than expected. A main factor behind expectations of further disinflation in April was a roughly 3% monthly drop in fuel prices.”
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Inflation low, but US Fed kept repo rate unchanged – Nedbank economists
Busisiwe Nkonki and Johannes (Matimba) Khosa, economists at the Nedbank Group Economic Unit, say the increase in inflation was slightly above their forecasts of 2.7%.
Does the surprisingly lower inflation mean that we can expect a repo rate cut next week when the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) has its bimonthly meeting?
Nkonki and Khosa say the MPC will have to weigh the benign inflation outlook against the potential upside risks that could emanate from the highly volatile and uncertain global environment. They also point out that the US Fed has decided to keep interest rates unchanged in May and assess the impact of the tariffs.
“We expect the Sarb to take a similar move next week, leaving interest rates unchanged. However, economic fundamentals show that there is still room for further cuts as monetary policy is still restrictive.”
They point out that the upward pressure on the inflation rate mainly came from food prices, which continued to increase off a low base, while housing and utilities also contributed and outweighed the impact of fuel deflation.
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Inflation expected to remain relatively subdued in 2025
“We forecast inflation to remain relatively subdued in the second quarter before drifting moderately upwards in the second half of the year. However, it will still average a muted 3.6% in 2025. During the second quarter, the downward pressure will mainly emanate from low fuel prices.
“Global oil prices are expected to remain low due to excess supply as a result of subdued demand, higher stockpiles in the US and increased output from OPEC. At the same time, the rand has recovered some ground from the US tariff shock, hovering around R18.00/$, up from R18.59/$ at the end of April.”
However, they warn that crude oil prices could start trending slightly higher during the second half of the year.
“Easing US-China trade tensions suggests that the tariff hikes could be less aggressive and therefore, the damage to global growth could be reduced.
“Food prices will also increase as the base continues to normalise and global food inflation rises. Even so, the upward pressure will partly be contained by crop prices, which will benefit from good rains.
“The biggest concern is the rand, which, despite its recent recovery, remains vulnerable to the persistent uncertainty in the global economy.”
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Although inflation is low, repo rate will remain unchanged – FNB economist
Koketso Mano, senior economist at FNB, says with an update of today’s data, FNB’s economists see headline inflation remaining stable in May at below 3% and with marginal monthly inflation.
“Some monthly pressure on food inflation will continue to be mitigated by fuel price declines while core inflation remains benign.
“We still foresee muted inflation over the next few months. Despite a rising trend into the second half of the year, inflation should remain below the target midpoint, supported by soft oil prices, a recovery in the rand’s value and weak economic activity. Headline inflation should average around 3.5% this year, down from 4.4% last year.”
Mano says the removal of the marginal impact that a Vat increase would have had on inflation should further assist with containing inflation expectations and supporting household spending growth.
However, she points out that growth forecasts were downgraded from nearly 2% at the start of this year to closer to 1% currently, weighing on employment prospects.
“This weak economic environment will weigh on pricing power and sustain space for easier monetary policy. However, a turbulent global environment and risk aversion, especially with local fiscal slippage, will likely keep the Sarb cautious.
“We predict that interest rates will remain unchanged at the May meeting, but apart from a wait-and-see approach that caters for global uncertainties, there is ample space for the committee to continue cutting interest rates.”
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Moderation of core inflation was good sign
Casey Sprake, economist at asset manager Anchor, says the moderation in core inflation, which excludes volatile components such as food and energy, which eased to 3.0% from 3.1% in March, suggests a continued softening of underlying inflationary pressures in the local economy, reflecting a broader trend of subdued pricing momentum across non-volatile goods and services.
“However, a notable exception to this trend was food and non-alcoholic beverages, where inflation accelerated to 4.0%, the highest annual rate since September 2024. The primary driver behind this surge was higher meat prices, particularly for beef products such as stewing beef, mince and steak.
“Meat prices increased by 2.3% between March and April, the biggest monthly gain since January 2023.
“As the largest component within the basket, meat alone accounts for 5.1% of total household spending, meaning consumers acutely feel these price increases, especially lower-income households where food constitutes a higher share of overall expenditure.
“Conversely, fuel prices remained a major disinflationary force, helping to anchor headline inflation. The sustained softness in global oil prices (despite rand volatility) has played a key role in tempering domestic inflation.
“This not only eases direct costs for consumers at the pump but also reduces input and transport costs for businesses, indirectly alleviating pressure on broader price levels.”
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Latest inflation data strengthens case for repo rate cut – Anchor
Sprake says from a macroeconomic perspective, the latest inflation data strengthens the case for the MPC to cut the repo rate.
“With core inflation easing, wage growth muted and consumer demand soft, real interest rates remain in restrictive territory.
“This means that current monetary policy is still exerting a significant dampening effect on the economy. As such, we expect the Sarb to cut the repo rate by 25 basis points at its upcoming MPC meeting on 29 May.
“The likelihood of a third rate cut later in 2025 remains evenly balanced at this stage, depending on a volatile mix of domestic and international factors, including global commodity prices, currency movements and geopolitical risks.”
