MPC preview: a further -25bp cut expected for South Africa

FRA pricings show a shallower outlook for South Africa’s interest cuts next year, as markets worry over a lower inflation target of 3.0% y/y while the US could cut interest rates by less than previously expected under increased protectionist policies.

From 20th January, incoming President, Donald Trump’s policy changes are expected to have a widespread effect on the economy, slowing US growth in the next two years at least, on increased trade tariffs on goods coming into the US. 

A blanket 10% tariff rise has been mooted, along with an increase of over 50% on goods imported from China, the US’s third largest trade partner, while Mexico, the US’s second largest trade partner, has been threatened with a 25% tariff rise. 

Canada, the US’s largest trade partner is at risk of a 10% tariff increase, which with retaliatory behaviour is expected to slow global and US economic growth, while pushing up inflation noticeably in the US and globally. 

Overall, the risks are seen to be elevated for next year, with US monetary policy uncertain, and the Fed could pause at its January FOMC meeting. Weaker US and SA GDP growth is a key risk next year, and so increased market risk aversion.

An end to the US cut cycle sooner than markets anticipate would also cause the rand to be weaker than our base case forecasts, and inflation to run higher, and fewer interest rate cuts could then occur in South Africa, with higher bond yields.

SA’s CPI inflation rate is likely to approach 3.0% y/y in October, published the day before SA’s interest rate announcement. The SARB targets a 4.5% y/y point, and inflation approaching 3.0% y/y is well below this but will be seen as temporary. 

However, the next two months of CPI inflation prints, November and December are also likely to be below 4.0% y/y, as are the five months from February 2025 to June 2025, with inflation unlikely to return to 4.5% before September 2025.

This is highly supportive of a small (-25bp) cut in the repo rate this month. The inflation environment has been very moderate in SA, with strong support from rand strength and a moderation in fuel commodity prices.