Cautious SARB weighs up trade-off between inflation and growth

The SA Reserve Bank (SARB) Governor’s speech should be considered as dovish, with the Monetary Policy Committee (MPC) describing inflation as well contained and the risks to inflation as balanced. Nevertheless, erring on the side of caution, the MPC cut the repo rate by 25 basis points (bp) to 7.75% and did not discuss a 50bp cut

The inflation forecast was revised lower in 4Q24 and 1Q25 from 3.6% and 3.7% to 3.2% and 3.5% although, on average, inflation in 2025 remains at 4.0%, well below the 4.5% target. Importantly, If the SARB continues to cut by only 25bp at every meeting until mid-2025, the real policy rate will average 4.0% over the next seven months. This should be considered as highly restrictive versus the neutral real rate of 2.7%. Maintaining the real rate at this level for an extended period may see critics raise suspicion that the SARB is implicitly adopting a lower inflation target without making a formal announcement. 

The SARB justified its decision to cut by only 25bp, citing uncertainty and medium-term risks to wages, food prices, electricity tariffs (now expected to increase 13.3% next year and 12.3% in 2026), water and insurance. Interestingly, wages are a concern despite the Bureau for Economic Research’s (BER’s) 2-year inflation expectations having fallen to 4.8%, and the SARB anticipating that they will fall further from current levels. The oil price is expected to average $78/barrel (bbl) next year in line with its 2024 average. 

A further upside risk to South Africa’s inflation outlook is USD strength, driven primarily by the relative attractiveness of the US versus the EU. The US soft landing narrative has remained intact, and its outperformance versus the EU will increase if 10% to 20% tariffs on EU exports are implemented, and if Trump follows through with fiscal stimulus. A further rand challenge is the commodity price outlook, which is clouded by China’s stubborn unresponsiveness to stimulus. 

A growth recovery is seen to be taking hold, supported by structural reforms starting to gain momentum. Although near term growth may disappoint, GDP is forecast to rise to 2.0% in 2027. Growth risks are also considered to be balanced – as highlighted by S&P’s upgrading SA’s credit rating outlook from BB- stable to BB- positive.

Our analysis of October’s CPI print showed that the passthrough, or second round effects, of the rand and fuel price appear to be zero, and that for electricity it may be negative, as households and businesses rely less and less on Eskom-generated power. This is evident in lower core inflation which was revised down to 3.9% in 2025. 

The SARB’s Quarterly Projection Model (QPM) or gap-model now expects a terminal policy rate of 7.3% by the end 2026, up from 7.1% at the September meeting. Challenging the environment globally means South Africa, as a high beta country, is vulnerable to global capital flows. Fiscal and monetary policy space needs to be ample enough to be flexible.