The South African Reserve Bank may cut rates by 25 basis points when it concludes its monetary policy meeting on Thursday (Oupa Nkosi)
The South African Reserve Bank (Sarb) may cut rates by 25 basis points when it concludes its monetary policy meeting (MPC) on Thursday, given that inflation remains within its target band, although there are risks from 30% United States tariffs on local exports, economists said.
The reserve bank, which holds its MPC meetings once every two months, cut the benchmark repurchase rate at which it lends to banks by 25 basis points to 7.25% in May, citing global economic volatility and uncertainty which were likely to dampen both global and domestic growth.
This was the fourth reduction in a series of 25 basis point interest rate cuts since September 2024, only interrupted by a pause in March. The decision came after Statistics South Africa data showed consumer inflation had edged up to 2.8% year-on-year in April from 2.7% in March, but central bank governor Lesetja Kganyago said underlying inflation was “well-contained”.
Inflation edged up to 3% in June after holding steady at 2.8% in May, but remains within the reserve bank’s target range of 3% and 6%, making the case for another 25 basis point interest rate cut, according to several economists.
“As it stands, we expect a 25 basis point interest rate cut at the upcoming MPC meeting on Thursday, albeit without full conviction,” said Casey Sprake, an economist at Anchor Capital. “This view is supported by subdued inflation and weak economic growth, with inflation expectations continuing to soften.”
The risks to inflation outlook remain “broadly balanced”, but food prices pose the most significant upside risk over the near term, according to economists at Nedbank, who also predicted a 25 basis point cut in interest rates on Thursday.
Food inflation reached a 15-month high in June, driven mainly by an increase in beef prices, while other unprocessed food items also saw an uptick, including those for fruits, nuts and vegetables, which remained in double-digit territory for a second straight month, according to Statistics South Africa.
With this scenario, “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”, Nedbank said in a note.
But “it is not all doom and gloom”; healthy local and global field crops may offset some of the pressure, alongside a drop in international oil prices, the bank added.
It based its rate cut forecast on subdued inflation, the rand holding up fairly well against the US dollar and the 30% US tariff set to kick in on 1 August, which could raise the need to cushion South Africa’s already struggling economy. GDP only expanded by 0.1% in the first quarter of 2025.
The reserve bank may also consider the US Federal Reserve’s decision, expected a day before, which could influence the rand and investor sentiment
“If the Fed holds as the markets expect, the Sarb may be more hesitant to ease as the rand could come under renewed pressure, especially as the 1 August deadline for the punishing 30% reciprocal tariff looms large in the background,” said Nedbank.
Economists are also keeping an eye on whether Kganyago will, on Thursday, discuss lowering the inflation target, which could affect the inflation outlook.
“Sarb governor Kganyago has cautioned against moving too quickly, especially in light of growth risks linked to the imminent imposition of 30% US tariffs on South African agricultural and manufacturing exports. These trade-related headwinds, alongside the evolving inflation target debate, could prompt caution from the MPC,” Anchor Capital’s Sprake told the Mail & Guardian.
“The direction of the inflation target, and how it interacts with inflation dynamics into 2025, will remain central to monetary policy decisions going forward.”
Absa Bank also expects a 25 basis point cut, but cautioned that reducing the inflation target could mean interest rates stay higher for longer while the economy re-adjusts to the new target.
“Further risks on the local front remain administered costs including electricity prices and a volatile South African rand should risk sentiment change,” Ricardo Smith, the chief investment officer at Absa Investments, told the M&G.