By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Rates remain unchanged... for now
Firstly, the 2Q25 GDP q/q outcome surprised the SARB, and us, resulting in an upward adjustment to growth. Interestingly, while we have kept our annual forecast unchanged, given that y/y growth underwhelmed, the SARB raised its 2025 forecast from 0.9% to 1.2%. The MPC highlighted resilient global conditions and improving credit conditions as supportive to activity but flagged ongoing trade barriers and local structural impediments, which would keep a lid on growth over the outlook. The SARB still sees growth rising towards 2% over the forecast horizon with risks viewed as balanced.
Secondly, the risks to the inflation outlook are also viewed as balanced. The SARB raised its inflation forecasts marginally, citing food and electricity price pressures which would be compounded by fading fuel deflation. In line with this, the outlook on policy rates has eased from nearly five 25-basis point (bp) cuts over the period to 2027 to nearly four. These figures should have been finalised before the August consumer inflation print but the point is that inflation is broadly expected to lift in 2H25 before slowing again in the outer forecast period. The outlook on inflation may be adjusted again in November, when another forecast year is added, potentially allowing the SARB to further reconsider its outlook.
Thirdly, and most importantly, the SARB is considering different scenarios for the adjustment in inflation expectations. As we have argued, the adaptiveness of price setters could be slower than preferred, even with consistent central bank communication and strong credibility. A slower adoption of the 3% target in financial planning would require a slightly more restrictive policy rate and weaker economic growth. We received the 3Q25 inflation expectations survey results this week, which reflected further slowing over the various time horizons. Over the two-year monetary policy implementation horizon, expectations have softened from 4.5% to 4.2%. Meanwhile, longer-term expectations are at their lowest since 2011, recording 4.2% from 4.4% previously. Notably, this slowing was driven by analyst expectations, which trend towards the MPC's 3% objective, while business and labour unions remain anchored above 4%. This highlights some rigidity in shifting towards the new de facto target by price setters.
Ultimately, the SARB thinks that the disinflation process embedded in their forecast is not reliant on ambitious assumptions on inflation expectations. Instead, softer import costs and restrictive monetary policy should keep inflationary pressures contained. However, they continue to express the importance of government being on board and slower administered price adjustments assisting with guiding expectations lower. We mentioned in our previous Economic's Weekly that forecasts are a great storytelling tool, but these forecasts are evolving. So, while today's outcome may be disappointing to some, stay tuned, further interest rate cuts could come sooner than expected.
Week in review
Headline inflation was 3.3% y/y in August, down from 3.5% in July. Monthly pressure was -0.1%, dictated by fuel as well as food and non-alcoholic beverages (NAB) deflation. Core inflation was 0.1% m/m and 3.1% y/y, up from 3.0% previously. Average fuel prices fell by 0.8% m/m and were 5.7% lower than at the same time last year. Food and NAB inflation recorded 5.2% y/y, down from 5.7% previously. Monthly deflation of 0.1% reflected meat and NAB inflation that was mitigated by cereals and vegetables deflation. We see headline inflation lifting slightly to 0.2% m/m and 3.4% y/y in September. There will be some core inflation pressures, as new housing inflation data becomes available. This is while average fuel prices continue to detract from monthly headline pressures. Fading positive base effects should support inflation, almost touching 4% in the last quarter of this year.
Retail sales showed a strong performance in July, registering 5.6% y/y, up from a softer 1.7% in June. On a month-on-month basis, volumes rebounded to 2.1%, following declines of 0.4% and 0.1% in May and June, respectively. The strength in retail, particularly in non-essential categories, reflects improving household purchasing power and balance sheets, as well as a less restrictive monetary policy.
Week ahead
On Tuesday, the leading business cycle indicator for July will come out. In June, it rose by 0.4% m/m to 111.7 points, following a 1.3% decline in May. The improvement was driven by gains in three of the seven available components, with the largest contributions coming from an acceleration in the six-month smoothed growth rate of real M1 money supply and an increase in South Africa's US dollar-denominated export commodity price index.
On Thursday, the 3Q25 FNB/BER Consumer Confidence Index (CCI) will be published. In 2Q25, the FNB/BER Consumer Confidence Index (CCI) rose from -20 to -10, partially recovering from a steep decline in the first quarter. This rebound followed a series of economic and political disruptions, including proposed VAT increases, political tensions and deteriorating relations with the United States. All three sub-indices—economic outlook, household finances, and the time to buy durable goods—showed improvement, with household finances turning positive.
Also on Thursday, producer inflation data for August will be released. In July, producer inflation accelerated to 1.5%, from 0.6% in June. Monthly pressure was 0.7%, driven mainly by increases in petrol and diesel, transport equipment and non-metallic minerals. Food prices, however, declined month-on-month, helping to contain pressure. Overall, producer inflation has been contained, averaging 0.7% year-to-date. .
