By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) decided to keep interest rates unchanged at their March meeting, halting a cutting cycle that has delivered 75-basis points (bps) to date, reducing the repo rate from 8.25% to 7.50%. The MPC, with a four against two vote split, continued to show a cautious approach as global headwinds unfold.
Fed rates unchanged
The United States (US) Federal Reserve also kept rates unchanged for the second consecutive meeting in March, citing elevated inflation risk as the new US administration's tariff policies stand to raise import costs. Although US-led tariffs have not been as broad-based as initially feared, they have been met with retaliation which could broaden the reach of the trade war over time. Unfortunately, not only do tariffs weigh on the economic outlook, but so does policy uncertainty. These developments have stoked recession risk in the US and sustained financial markets volatility. While the prognosis on growth has worsened, the Fed appears to be more concerned about the risk to inflation.
A volatile globe is bad for emerging markets
A global environment that is marred with uncertainty will likely keep monetary policy cautious and words such as "not in a hurry" will become thematic. Rising global debt, compounded by increased defence and infrastructure investment spending in advanced economies, will likely exert upward pressure on the cost of borrowing, diverging from the trends of the 2010s. For emerging markets, the initial concern should be around access to global capital markets to support ongoing investments into structural reform and productivity. A failure to improve productivity will impede the ability to attract new trade relations as supply chains are re-negotiated. In such an environment, delays in reining-in fruitless expenditure while running deficits on external accounts will raise risk premia and neutral interest rates.
The SARB's prognosis on the SA economy
While the MPC highlighted that the improved risk perception towards SA may be at risk, they have scaled down growth and inflation projections. The growth outlook, which anticipates rates of no more than 2%, has downside risk. Surveyed inflation expectations have settled even closer to the midpoint target and, even with a VAT increase, inflation should average below the midpoint this year, which will assist with containing expectations in future survey outcomes. However, deteriorating relations with the US could impair sentiment and capital inflows, weigh on the rand, and raise inflation. This risk, alongside policy fractures within the GNU, have warranted that the MPC delay further cuts.
More interest rate cuts to come?
Our position is that the MPC will deliver a slow and shallow cutting cycle. Therefore, the March decision is simply a pause in the cycle, and a possible resumption with 25bps in May is in our outlook. We see a further 25bp cut in November and at that stage, monetary policy would start having a neutral impact on the outlook for economic activity. That said, should the outlined sentiment and inflation risks materialise, there is no doubt that the MPC will delay further cuts or hike interest rates to support a stable macroeconomic environment.
Week in review
Headline inflation came in at 3.2% y/y in February, unchanged from January's figure. Monthly pressure was 0.9%, led by contributions from core inflation - specifically medical insurance premium increases. In March, we see inflation decelerating to 2.9% as positive base effects keep a lid on inflation. However, monthly pressure will be sustained by several infrequent survey outcomes, such as housing and education, which will be featured in the March figures. As the year progresses, the fading of base effects, some spending growth, and a VAT increase should support faster inflation. That said, we anticipate that average inflation will be below 4.0% this year, slower than 4.4% in 2024.
Retail sales growth surged to 7.0% y/y, a significant increase from 3.2% y/y in December, and well above the 4.0% volume forecast by Reuters. Month-on-month sales rebounded by 1.2%, reversing the previous 0.4% decline. The increase in retail activity was broad-based, led by General dealers (8.4% y/y, contributing 3.6 ppts) and Clothing and footwear retailers (10.1% y/y, contributing 1.6 ppts). This uptick reflects an improving consumer environment, driven by factors such as: recovery in household incomes due to accelerating wages and moderating inflation; lower borrowing costs; and a temporary income boost from the two-pot pension system withdrawals.
Week ahead
On Tuesday, the FNB/BER Consumer Confidence Index (CCI) for 1Q25 will be published. In 4Q24, the CCI slipped marginally to -6 index points from -5 points previously. Nevertheless, this was the highest festive season reading since 2019 and remained considerably higher than the -17 points recorded in 4Q23, reflecting an improved consumer environment.
Also on Tuesday, the leading business cycle indicator for January will be released. After a revised 0.7% m/m increase in November, the leading business cycle indicator reversed course in December, falling by 1.8%. The decline was driven by widespread decreases across most components, notably a slowdown in vehicle sales and fewer building plan approvals, with only job advertisement growth showing improvement. Nevertheless, the leading indicator still rose by 1.6% y/y, albeit moderating from 2.5% previously, marking the ninth consecutive month of annual growth. This aligns with our view of an economic upturn, with growth expected to recover from below 1% over the past two years to nearly 2% in 2025/26.
Tuesday will also see the release of the Quarterly Employment Statistics (QES) for 4Q24. Employment in the formal non-agricultural sectors of the economy contracted by over 130 000 jobs, or -1.2% q/q in 3Q24. Many of the jobs shed were in community services, primarily reflecting part-time jobs lost between 2Q24 and 3Q24. Compared to 3Q23, over 290 000 jobs (2.7%) have been lost but over 380 000 jobs have been added since 3Q19. There were 10.6 million workers in the formal economy in 3Q24. The South African economy is expected to grow by nearly 2% over the medium term. Structural reform, and related investment, should support a more conducive operating environment, productivity, profitability, and employment creation.
On Thursday, the FNB/BER Civil Confidence Index for 1Q25 will be released. After surging to an eight-year high of 50 points in 3Q24, sentiment in the civil sector retreated to 48 in 4Q. The slight deterioration was driven by renewed concerns over lack of activity growth. However, this was partially counteracted by an improvement in overall profitability.
Also on Thursday, producer inflation data for February will be released. In January, producer inflation was 1.1% y/y, reflecting a modest acceleration from 0.7% in December. Monthly inflation was 0.5%, the highest since April 2024, driven by increases in fuel prices and the costs of metals, machinery, equipment, and computing equipment. Vehicle prices also climbed by 1.3%, reversing three consecutive months of deflation. We expect producer inflation to have lifted further to 1.3% y/y in February, with monthly pressure at around 0.7% underpinned by fuel price increases.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 19 Mar | SA | CPI % y/y | Feb | 3.2 | 3.2 |
| SA | CPI % m/m | Feb | 0.9 | 0.3 | |
| SA | Retail sales % y/y | Jan | 7.0 | 3.2 | |
| SA | Retail sales % m/m | Jan | 1.2 | -0.4 | |
| 20 Mar | SA | SARB interest rate announcement | Mar | 7.25 | 7.25 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 25 Mar | SA | FNB/BER Consumer Confidence Index | 1Q25 | -- | -6 |
| SA | Leading Business Cycle Indicator | Jan | -- | 112.8 | |
| SA | Quartely Employment Statistics % q/q | 4Q24 | -- | -1.2 | |
| 27 Mar | SA | FNB/BER Civil Confidence Index | 1Q25 | -- | 48 |
| SA | Produce Price Inflation % y/y | Feb | -- | 1.1 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 90,149.69 | 3.80% | 2.00% | 25.40% |
| USD/ZAR | 18.12 | -1.20% | -2.20% | -4.10% |
| EUR/ZAR | 19.76 | -1.00% | 2.30% | -3.80% |
| GBP/ZAR | 23.57 | -0.80% | 1.10% | -2.00% |
| Platinum US$/oz. | 997.6 | 1.00% | 2.20% | 11.20% |
| Gold US$/oz. | 3,047.79 | 3.90% | 3.90% | 41.30% |
| Brent US$/barrel | 70.78 | -0.20% | -6.90% | -19.00% |
| SA 10 year bond yield | 9.82 | 0.40% | -0.60% | -13.10% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 0.6 | 1.7 | 1.8 | 2.1 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.0 | 2.1 | 2.2 | 2.3 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -3.7 | 1.4 | 2.8 | 3.9 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.4 | 4.0 | 4.5 | 4.4 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.0 | 5.0 | 4.4 | 4.4 |
| Repo rate (year end) %p.a. | 7.00 | 8.25 | 7.75 | 7.00 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 10.50 | 11.75 | 11.25 | 10.50 | 10.50 | 10.50 |
| USD/ZAR (average) | 16.40 | 18.5 | 18.3 | 18.4 | 18.6 | 19.0 |
