After two repo rate cuts of 25 basis points at the end of 2024, consumers are wondering if there will be more cuts in 2025.
Although economists were positive when the South African Reserve Bank (Sarb) started cutting the repo rate in September last year, expecting at least three cuts in 2025, Thursday’s expected cut could be the last due to higher inflation and geopolitical risks.
However, most economists expect at least one more repo rate cut this year after the Monetary Policy Committee (MPC) of Sarb meeting on Thursday.
Nicky Weimar and Johannes Khosa, economists at the Nedbank Group Economic Unit, expect another 25 basis points repo rate cut, mainly based on the benign inflation outcomes of the past two months and a relatively subdued inflation outlook.
They point out that inflation is forecast to drift upwards in the months ahead but will still average a muted 4% in 2025.
“Mild upward pressure will likely come from food and fuel prices, as they start to climb off a much lower base.
“Increasing global food prices and a weaker rand are expected to offset the downward pressure exerted by higher domestic food production, which should benefit from good rains over the past two months.
“Fuel price deflation will also gradually fade and reverse. While global oil prices are forecast to decline, a low base and a weaker rand will slowly lift local fuel prices to higher ground.
“Meanwhile, still restrictive monetary policy, price-sensitive local demand and lower domestic operating costs on fewer power outages and other disruptions should contain core inflation to around the Sarb’s 4.5% target in 2025.”
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Risks MPC pointed out in November materialising
In addition, they point out that some of the upside risks the MPC envisaged in November materialised. “The rand came under renewed pressure against a resurgent US dollar, which benefited from the anticipated impact of the second Trump administration’s economic policies.
“The markets argued that Trump’s policy agenda would sustain US economic outperformance albeit at the expense of higher inflation, which would probably lead to a more hawkish Federal Reserve and fewer US interest rate cuts.”
Weimar and Khosa say investors consequently expected interest rate differentials to shift in favour of the US dollar. Global oil prices also increased, driven by higher seasonal demand caused by a colder-than-usual winter in the Northern Hemisphere.
On the domestic front, the trajectory of electricity tariffs also remains unresolved, with the National Energy Regulator of South Africa laying its decision on Eskom’s proposed hikes to the end of January.
They warn that while global oil prices are unlikely to hold onto recent gains, the rand faces another volatile year. “The currency’s recent slide and underlying vulnerability to shifting global risk appetites will make the MPC more cautious.
“Even so, the US Fed already reduced its policy rate by 100 basis points, while the Sarb has only eased by 50 basis points, creating some space for more rate cuts without placing the rand under too much pressure.
“At the same time, inflation has declined significantly, and the outlook remains relatively subdued. More importantly, monetary policy is still restrictive, with real interest rates rising to just short of 5%. Therefore, we see room for further moderate policy easing.”
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Nedbank expects only two more 25 basis points repo rate cuts in 2025
Weimar and Khosa only expect two more rate cuts of 25 basis points each in 2025: one on Thursday and another in March, taking the repo rate to 7.25% and the prime rate to 10.75%. They say this aligns with the November estimates of Sarb’s Quarterly Projection Model, which also pointed to reductions of about 50 basis points in 2025.
“With inflation well below the Sarb’s 4.5% target and expected to remain relatively subdued, we believe there is room for further monetary policy easing. Although domestic demand is gradually recovering, supply-side constraints are also easing, although slowly. At this level, interest rates will still be 50 basis points higher than just before the Covid-19 pandemic struck.”
Lullu Krugel, partner and chief economist at PwC, says PwC’s baseline scenario expects that the Sarb will cut the repo rate by another 50 basis points in early 2025 based on the current 3%-6% inflation target.
“A review of the inflation target by the Sarb and National Treasury is coming to a conclusion. Achieving sustainably lower inflation and inflation expectations (essential to managing the inflation outlook) could result in structurally lower interest rates.”
According to PwC’s economic outlook for 2025, the repo rate expected to decline by another 50 basis points in 2025 – or up to 100 basis points under an upside scenario.
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Inflation expected to behave, but Trump policy not so much
Mike van der Westhuizen, portfolio manager at Citadel, says local inflation should remain well-behaved, which gives the Sarb room to cut interest rates twice or three times in 2025.
“Citadel expects US inflation to remain above the 2% central bank target. The US Fed’s reaction function will depend on the combination of inflation and unemployment. With some growth slowdown and inflation that is not expected to reaccelerate aggressively, the Fed could cut rates two to three times this year.”
However, he points out that the market awaits more clarity on Trump’s policy and its potential impact on inflation.
