CPI inflation March 2025: A broad-based decline
CPI inflation surprised on the downside in March, declining to 2.7% from 3.2% and below consensus forecasts of 3.0%. Services inflation, including quarterly rental increases and primary and tertiary education increases, recorded subdued increases. As a result, services inflation declined to 3.5%, down from 3.8% in February and 4.2% in December.
Where are the pressure points in inflation? Despite the turmoil in financial markets and a depreciation of the rand, we have not made significant adjustments to the inflation forecast, and the outlook remains benign. Historically, rand weakness has translated into increased fuel prices; however, this time, a weaker rand has coincided with a decline in oil prices, which has outpaced the rand's depreciation since February. However, the NEER has depreciated by 3.8% since early March as it retreated against the cross in the wake of USD weakness and a strong rally in safe haven currencies such as the CHF, Euro, and JPY.
The inflation outlook remains benign. Inflation is projected to moderate from an average of 3.0% in Q1 25 (in line with the SARB’s forecast) to 2.9% in Q2 25 (SARB: 3.1%). Following this, base effects and a 12.7% increase in electricity tariffs could accelerate inflation to 3.8% in Q3 2025 and 4.3% in Q4 25 (consistent with the SARB’s outlook). The MPC focuses on inflation four quarters ahead, projected at 4.5%, and in view of the balance of risk assessment, the conviction in the forecast is not high.
Can the MPC cut the repo rate in May? The answer is yes, from where we stand. We do not anticipate a significant revision to the SARB’s inflation forecast, and the primary focus will be on the balance of risk assessment. This encompasses unfolding external dynamics, the performance of the rand, and internal factors such as the GNU and fiscal risks that feed into the country risk premium. However, the economic outlook has deteriorated, and 2025 GDP growth forecasts are being reduced. ICIB has cut its forecast from 1.8% to 1.4%; the IMF from 1.5% to 1.0%, with the SARB’s forecast at 1.7% and National Treasury at 1.8% also likely to be lowered. Incoming indicators for Q1 25 show a weak start as the carryover momentum from 2024’s 0.6% has been weak.