Despite a slight rise in the cost of living for April, economists foresee potential interest rate cuts, offering hope for South African consumers.
Image: Ayanda Ndamane / Independent Newspapers.
While the rate of increases in the cost of living may have ticked somewhat higher for April, some economists are anticipating a different sort of good news: potential interest rate cuts.
Statistics South Africa will release its consumer price index data for April on May 21 – the same day as Budget 3.0. This information will be taken into consideration at the next Monetary Policy Meeting of the South African Reserve Bank. That committee will announce its decision on interest rates a week later.
Investec chief economist, Annabel Bishop, said that there are likely to be two interest rate cuts this year of 0.25 percentage points. This, however, depended on whether the US Federal Reserve limits its cutting cycle to two drops of 0.25 percentage points each instead of the anticipated three.
Old Mutual chief economist, Johann Els, told IOL that the South African Reserve Bank is likely to be conservative given current geopolitical issues. However, the low inflation rate could lead several committee members to cut, especially given the local currency’s reversal of more than R19 to the dollar in the first week of last month, dropping fuel prices, and repeated downward revisions in inflation from the central bank.
Although the cost of living rose slightly in April, some economists expect good news: possible interest rate cuts.
Image: Stats SA/SARB/Investec
“I think the governor is going to be still very cautious and worried about global risks. But I think the balance of the committee might shift to a cut… There is a window of opportunity. But still, I think it's a 50-50 chance for a rate cut in May,” said Els.
Els added that there was, however, room for a cumulative 0.75 percentage point cut currently. “If they don't cut in May, they will definitely cut in July.”
Bishop noted that the rate of increase in the cost of living is at its lowest point currently in the inflation cycle at 2.7%. This, she pointed out, compares with the 7.8% year-on-year rate seen in July 2022, although its move to the lower end of the South African Reserve Bank’s target of 3% to 6% was “quite uneven”.
Investec’s expectation for April is a rate of nearer to 3%. “The overall moderation in inflation was caused by slowing inflationary pressures as fuel prices fell markedly in periods, along with lower agricultural price pressures, while the rand saw periods of strength and demand pressures were weak overall,” said Bishop.
Bishop added that the consumer price index, which averaged 4.4% last year, is expected to average near 3.5% for 2025 on a year-on-year basis, which she said is “a very modest outcome”.
Els’ forecast for inflation is more optimistic as he pegged inflation during the second quarter to average 2.5%. “So very low inflation, much lower than the inflation target.”
Yet, Casey Sprake, economist at Anchor Capital, explained that food inflation is expected to rise moderately in the coming months, influenced by uncertainty around US policy direction and its potential impact on global markets and the rand.
“However, the National Treasury’s decision to scrap the proposed VAT increase has removed an immediate risk of added consumer pressure on non-zero-rated goods,” Sprake said. “Additionally, the expected recovery in summer crop yields should help lower feed costs for livestock producers and ease prices of key staple foods. That said, ongoing outbreaks of animal diseases remain a key risk, particularly for meat and dairy supply and pricing,” she added.
Market participants are closely monitoring fast-moving policy developments, particularly new tariff measures by the US and the potential for retaliatory actions, said Sprake. “These shifts in the global trade environment will likely influence broader macroeconomic conditions, including energy prices, currency movements, and economic growth, all carrying further implications for agricultural production and trade.”
IOL