Will the Reserve Bank decide to cut the repo rate on Thursday, as some economists believe, or is it too tight to call, given the volatility and uncertainty that have plagued South Africa and the rest of the world since the beginning of the year?
Inflation is not much of a problem as it increased by only 0.2% in June to 3% from 2.8% in May and April, but geopolitical and local political issues can affect inflation in the months to come. The rand has also been quite stable and some economists expect it can dip below R17 again.
What stops the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) from cutting the repo rate again? While most economists said last week when they commented on the inflation rate that they do not expect the repo rate to be cut this week, there are some that believe it will happen.
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Repo rate cut of 25 basis points expected
Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), expects the Sarb to cut by another 25 basis points, although there is a slight chance that the MPC will decide to keep rates on hold.
In addition to the actual decision, she expects that the Sarb will publish a 3% inflation scenario once again as it did in May. “It will be interesting to see if and how this has changed compared to May. If not mentioned explicitly in the statement, the governor is sure to be quizzed about the progress with the potential move towards a target of 3% afterwards.
“Although we deem this unlikely, as we expect the announcement to come from the finance minister himself, there is a slight possibility that the governor firms up timelines next week. The markets would welcome more clarity.”
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De Schepper points out that the US Federal Reserve (Fed) has an interest rate meeting the day before the Sarb. “The Fed is expected to keep rates on hold. Markets will be more interested in hearing what the Fed chair has to say about interest rate movements going forward and whether he comments on the Trump administration’s continued demands for lower interest rates and his future at the Fed.”
‘Inflation remains tame’
Nicky Weimar and Johannes (Matimba) Khosa, economists at the Nedbank Group Economic Unit, also predict a repo rate cut of 25 basis points because “inflation remains tame, the risks to the outlook are relatively balanced and demand pressure on prices is timid at best”.
They point out that inflation is still comfortably below the 4.5% target. “Continued fuel price deflation and fading core inflation kept the impact of higher food prices in check.
“In essence, the sources of upward pressure remained few and isolated, with over 66% of the goods and services in the consumer price index increasing by less than 4.5%. Just to underscore the benign environment, core inflation eased from 3% in May to 2.9% in June.”
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Weimar and Khosa point out that the risks to the inflation outlook still appear broadly balanced since the last meeting in May. “In our view, food prices pose the most significant upside risk over the near term.
“On this front, a low base will amplify the impact of higher international food prices and potential supply disruptions caused by fresh outbreaks of foot-and-mouth disease. But it is not all doom and gloom. Healthy local and global field crops should offer some counterweight.
“Furthermore, international oil prices have fallen to around $70 per barrel as the focus shifted from the conflict in the Middle East to underlying market fundamentals.”
Oil and rand look good for repo rate cut, but tariffs could be a problem
They say the oil market will likely remain in surplus, with OPEC+ increasing production as global demand cools, thereby lowering prices. “So far, the rand stood tall, even after the US announced that South African exporters will face a 30% ‘reciprocal’ tariff come 1 August.
“To be clear, if the 30% tariff sticks or no deal is struck, it will hurt exports, threaten precious jobs and weaken the economy. Usually, the rand would depreciate to compensate for the loss of competitiveness caused by higher tariffs. Yet, the rand strengthened, local bond yields eased and the country’s risk premium declined a little further.”
Weimar and Khosa say the rand owes much of its resilience to the US dollar’s continued woes, although the greenback stabilised somewhat in recent weeks, supported by expectations that the Fed would leave its policy rate unchanged for longer.
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However, they point out, the dollar has not managed to claw back the losses incurred since ‘Liberation Day’. “We believe concerns over the Trump administration’s persistent attacks on Fed Chair Jerome Powell and the perceived threat to the central bank’s independence probably worked against a more meaningful recovery.
“We expect the dollar to tread water for a while, frozen in place by policy uncertainty. By implication, we forecast a relatively steady rand. Finally, the domestic economy remains sluggish and there is no evidence of significant demand pressure on prices.”
Caution needed with 2025’s uncertainty
Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say the decision will be a tight one to call given the volatility and uncertainty that has plagued 2025.
“The direction of travel appeared less uncertain in January when the MPC delivered its third 25 basis points cut and continued a cutting cycle that followed a relatively aggressive hiking campaign since the adoption of inflation targeting.
“However, it became evident at the March meeting that global headwinds would force monetary policy to be more cautious than what has already been traditionally. Aside from the impact of South Africa’s comparatively high inflation target and a higher risk premium during times of volatility, pronounced caution is also reflected in the very shallow yet protracted cutting cycle.”
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They say the data-dependency and interrupted momentum reflected so far, with the MPC resuming the cutting cycle in May, makes predictions for the upcoming meetings challenging.
July repo rate cut vs September cut
However, they believe there is space for one more cut this year, making a case for a July cut as well as one for September.
On the case for a July cut, they say while global conditions remain uncertain and local inflation should accelerate in the coming months as positive base effects fade and food price pressures mount, headline inflation should remain contained around the 4.5% midpoint of the target range.
“In addition, weak oil prices and a slow recovery in economic activity should arrest the increase in inflation. In addition, the dollar’s weakness, as well as terms of trade gains from higher precious metal prices, so far supported a resilient rand. This would counter the MPC’s fears surrounding global dynamics, choosing instead to support a benign local environment.”
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On the case for a September cut, they say a contentious global trade environment that could intermittently dampen sentiment, lift the cost of borrowing and weaken the rand, would continue to concern the MPC.
Repo rate if US tariffs on SA imports remain at 30%
Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano point to the May meeting that included scenario analysis of higher tariffs on South African exports to the US of up to 30% (10% effective). “While growth would be softer in this scenario, a weaker rand would push inflation higher and the repo rate would increase.
“We do not believe that the impact on inflation is that obvious given that weak economic activity could dampen cost and exchange rate passthrough. Furthermore, cheaper imports from the East will likely contain inflation in various consumer goods such as vehicles.”
Therefore, they say they do not expect a complete pivot in the interest rate cycle but expect that monetary policy would certainly be more cautious. Another scenario presented at the May meeting was a lowering of the inflation target, another factor that could restrain policy easing, especially with inflation set to accelerate in the near term.
“Ultimately, we think the MPC will keep rates unchanged at the July meeting, but we would not be surprised if it opted for an earlier move.”