Good news for inflation and interest rates in South Africa

South Africa is set for a low-inflation year, which spells good news for potential interest rate cuts in the country.

CPI inflation in South Africa is at its lowest point in the inflation cycle, with March coming in at 2.7%, having fallen from 7.8% in July 2022.

This means CPI is below the lower end of the Reserve Bank’s inflation target range of 3% to 6%, although Investec chief economist Annabel Bishop explained that its path has been quite uneven. 

After reaching 2.8% in October 2024, inflation rose to 3.2% by January 2025 and remained there in February, before dropping to 2.7% in March. 

Core inflation, which excludes food, non-alcoholic beverages, fuel and energy prices, has now dropped to 3.1% in the latest data for March.

This is down significantly from 5.3% two years ago, as the underlying nature of inflation in South Africa is very moderate. Bishop said April is expected to see inflation move up again to near 3.0%.

She explained that the overall moderation in CPI 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.

April saw only a mild lift in US dollar international agricultural prices, of 0.2% month-on-month.

However, the rand saw a weaker outcome in April, contracting by 3.3% against the US dollar amidst a jump in political risk as the DA’s future in the Government of National Unity came into question.

Luckily, the rand’s reaction to this domestic political turmoil has died down since, and the domestic currency subsided back to levels seen at the end of March. 

In addition, the fuel price fell by 72 cents/litre in April and again by 22 cents/litre at the start of May. These cuts came mainly due to the drop in the oil price.

“International oil and petroleum product prices dropped sharply on a rise in global financial markets’ concerns over global growth, along with the US administration’s efforts to increase oil supply and moderate prices,” Bishop explained.

Therefore, Bishop expects CPI inflation to average 4.4% year-on-year for 2024 and is expected to average near 3.5% for 2025.

She said this is a very modest outcome, which will help support the targeted measure of inflation averaging 4.5% for 2026. 

In addition, with CPI inflation expected to be at the inflation target midpoint of 4.5% over the next two years, the time period the Reserve Bank’s MPC targets, further cuts in the domestic interest rate cycle are expected.

Interest rate cuts coming – with a catch

Bishop expects the South African Reserve Bank (SARB) to cut the country’s interest rates by 25 basis points at its July meeting and by a further 25 basis points in November. 

These cuts would not only bring relief for South African households struggling with the cost of living, but could also benefit the rand. 

This is because the US is expected to cut its interest rates by 75 basis points in 2025, supporting the rand and aiding further currency strength.

Aluma Capital chief economist Frederick Mitchell recently explained that, as May 2025 approaches, the global economic landscape is set to be shaped significantly by upcoming interest rate decisions.

Specifically, Mitchel said the decisions of the United States Federal Reserve and the SARB’s Monetary Policy Committee (MPC) will be noteworthy. 

“Both central banks operate within interconnected financial systems and face complex domestic and international challenges,” he said. 

“Their decisions will have profound implications not only for their respective economies but also, in the US’s case, global markets, especially given the geopolitical tensions and trade dynamics currently at play.”

He said the Fed is widely expected to keep interest rates steady at around 4.5%. Under Jerome Powell’s leadership, the central bank has taken a cautious stance despite mounting calls for rate cuts to stimulate growth. 

He explained that the Fed’s primary concern remains inflation, which is subtly rising due to persistent tariff-induced import price increases stemming from the ongoing trade conflict with China. 

These tariffs have increased costs for imported goods, contributing to inflationary pressures above the Fed’s 2% target.

In addition, recent robust employment data suggests a resilient US labour market, allowing President Trump to call for a more accommodative stance towards interest rates by the Fed. 

“Maintaining current rates is seen as a prudent move from the Fed perspective to prevent inflation expectations from anchoring higher, with the Fed emphasising data dependency amidst geopolitical tensions and trade uncertainties,” Mitchell said. 

“Such a cautious approach underscores the Fed’s commitment to long-term price stability, even as domestic economic resilience continues.”

In South Africa’s case, the SARB’s MPC will need to balance external influences and domestic conditions when making its decision later this month.

Mitchell said South Africa’s economic environment presents a contrasting scenario. While inflation is low and stable, demand remains subdued due to high living costs, stagnant wages, and a cautious lending environment.

In addition, external factors play a pivotal role in South Africa’s monetary policy outlook. 

The rand has recently strengthened against the US dollar, and declining oil prices over the past month have led to lower import costs, further reducing inflation pressures.

Mitchell said these external conditions may justify a shift towards easing monetary policy, which could be a positive development.

 “A rate cut could stimulate borrowing, increase consumer spending and in doing so help to bolster domestic demand without risking an uptick in inflation,” he said. 

However, Mitchell warned that the SARB is likely to proceed cautiously, cognisant of geopolitical uncertainties and external shocks that could offset the benefits of lower interest rates.