The MPC reduced the repo rate by 25bps, aligning with market expectations. Notably, one of the five committee members advocated for a more substantial cut of 50bps. We believe that monetary policy has been overly restrictive, so a 50bps cut would have been warranted. This leaves the door open for a another 25bps rate cut in the September or November MPC meetings, but this will be contingent on a decision around the inflation target.
The risk assessment regarding the inflation outlook appears balanced, as both external uncertainties and local dynamics have stabilised, which is evidenced by the recovery of the rand.
Key takeaways
Benign inflation outlook
Global disinflationary pressures have intensified due to lower global expectations, declining oil prices, excess capacity in nations such as China, and a weaker US dollar index. However, there are complexities arising from higher tariff-related inflation in the United States and possible supply chain disruptions.
We note that the inflation outlook remains uncertain in light of the recent US Federal court ruling against President Trump’s fentanyl and reciprocal tariffs, except for sector-specific tariffs. This ruling may lead to an increase in front-loaded imports into the US as we saw in Q1 25, leading to an elevated trade deficit.
Furthermore, President Trump’s tax cut bill, which has passed in Congress and is now proceeding to the Senate, is perceived to be partially funded by customs duties aimed at offsetting some of the tax reductions. Trade negotiations could also be impacted as the White House has indicated plans to appeal the court ruling.
The SARB expects inflation to remain below 4.0% until Q1 26, before returning to the upper end of the target band in Q2 26. Inflation is projected to average 3.2% (P: 3.6%) and 4.2% (P: 4.5%) in 2025 and 2026. Disinflationary forces such as a lower oil price and a stronger rand.
Terminal rate lowered to ~7.0%
The lower inflation projections have led to a revision of the neutral rate, which is now expected to decrease by 25 basis points to 6.90% by the end of 2025 and 2026, assuming the inflation target remains at 4.5%. This indicates the possibility of an additional 25-basis-point rate cut in the second half of 2025. However, we do not foresee a rate cut occurring as soon as the July MPC meeting, but possibly in one of the two final meetings in 2025.
GDP growth outlook dialled down
A weak start to mining and manufacturing production in Q1, coupled with a moderation in global growth, has prompted the SARB to revise its GDP growth forecast. The updated projections now estimate GDP growth at 1.2% for 2025, down from 1.7% in March 2025. For 2026 and 2027, the forecasts have been adjusted to 1.5% (previously 1.8%) and 1.8% (previously 2.0%), respectively. These revised figures are slightly below the Bloomberg consensus, which aligns with ICIB's forecast of 1.3% and the National Treasury's estimate of 1.4%.
Discussion of lowering the inflation target discussions at an advanced stage
The discussion around lowering the inflation target has been a significant focus in the MPC statement and the subsequent Q&A session. The Governor has strongly advocated for a lower inflation target, arguing that as inflation rates have declined, this presents a prime opportunity to secure lower inflation at minimal cost.
The technical analysis, which encompasses determining the optimal inflation target, sacrifice ratios, and benchmarking, has been completed. The current focus has shifted to the mechanics of the transition, specifically the timeline for moving from the existing target range of 3% to 6.0% to a new preferred target of 4.5%.
The statement highlighted that "growth is somewhat slower at first, due to initially higher real rates, but the economy performs better later in the forecast as rates ease further". In light of the weaker GDP growth prospects for 2025, persistently high real rates may hinder a cyclical rebound in demand.
The Governor emphasised that the decision ultimately lies with the government, as securing buy-in is crucial for implementing other policies needed to address inflation. In particular, the elevated administrated price increases should be recalibrated in conjunction with a lower inflation target. It is noteworthy that private sector inflation is currently closer to 3.0%, while administered prices, excluding fuel, stand at 6.6%.
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