Will inflation stay above 3%, and will the repo rate be cut again after a 25 basis point cut in July, or will the Reserve Bank rather pause the cutting cycle?
Consumers will be watching the news closely on Wednesday when Statistics SA releases the inflation rate for August and on Thursday when the South African Reserve Bank announces its latest repo rate decision.
Will inflation stay above 3%, and will the repo rate be cut again?
Tracey-Lee Solomon, an economist at the Bureau for Economic Research (BER), expects that inflation was stable at 3.5% in August, remaining just above the preferred 3% of the South African Reserve Bank (Sarb).
“There is some chance for an upward surprise with a handful of municipalities’ tariff increases not yet captured last month, but this should not be significant.”
Solomon says while some experts argue there is scope for a cut based on the argument that it would show it believes a lower inflation target is attainable without high rates, the BER sees rates remaining on hold.
“While the Sarb is likely to tolerate the above 3% inflation over the near term, it will, in our opinion, keep rates on hold until it can more firmly and confidently pin its forecasts around 3%. It will be interesting to see the Sarb’s gross domestic product (GDP) forecast after the better-than-expected GDP for the second quarter and how it assesses the risks to the inflation outlook.”
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Nedbank economists: inflation above 3%, repo rate on pause
Nicky Weimar and Johannes (Matimba) Khosa, economists at the Nedbank Group Economic Unit, say with inflation increasing away from the Sarb’s preferred 3% anchor, they believe the MPC will leave interest rates unchanged this week.
“We suspect the Sarb would need time to assess the nature of the current inflation cycle. The underlying drivers appear temporary, but it is still too early to rule out the possibility of secondary effects.
“At this stage, the risks to the inflation outlook seem balanced, with the upside risks from food and electricity countered by downside risks from a stronger rand, lower global oil prices and patchy domestic demand.”
They say that given that the changes in US trade policy only kicked in recently, the effects on the international and local economies will take time to filter through. “We forecast a modest upcycle in inflation, which will probably lead to a pause in the rate-cutting cycle this week.
“We do not expect meaningful or sustained secondary price effects and therefore believe that the Monetary Policy Committee (MPC) will look through the upturn in inflation and leave interest rates unchanged.
“If meat prices reverse course, the impact of utilities remains contained and the rand strengthens more than we currently anticipate, the upward pressure on inflation could fall away relatively quickly and open the door to further easing.
“We believe the MPC will leave the repo rate unchanged at this week’s meeting, pausing its easing cycle, which started in September last year.”
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FNB economists: inflation remains the same, repo rate as well
Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, expect the MPC to keep interest rates unchanged, although the July MPC forecast shows that their econometric model anticipates that there will be sufficient space for the committee to lengthen the cutting cycle without much delay.
“We see headline inflation remaining flat in August, and while it should continue rising in the second half of this year, it should remain contained around 4% and average around 3.5% this year.”
They point out that the Quarterly Projection Model’s (QPM) repo path, reflected in the July MPC forecast, indicates at least one more 25 basis point cut this year and nearly two next year, before rates settle just below 6% in 2027.
This contrasts with the May MPC path, which had rates settling around 7% over the medium term. The FNB economists say the logic that drives the revised outlook is a lower inflation target and soft headline inflation, as well as stronger central bank credibility and communication. As the output gap narrows and inflation is entrenched at 3%, monetary policy should be neutral.
“Therefore, there would be further space to cut interest rates, towards 5.5%, in the period beyond 2027. The current consensus is that the MPC could resume the cutting cycle early next year. We think the resumption could be even more delayed to the second half of 2026, but as per usual, timing is difficult to predict.”
However, the reason for the delay is clear, they say. “Many analysts think it will be dictated by rising inflation in the second half of 2025 as well as slow collaborative efforts by the public sector to reduce price growth and assist with managing inflation expectations more efficiently.
“In a nutshell, most analysts think that the July cut was the last for 2025. The speed of transmission from policy and industrial reforms to price growth expectations will dictate how long it will take the MPC to remove monetary restrictions.
“We all agree that it will be able to resume the cutting cycle before inflation is anchored at 3%; we just think convincing figures before the second half of 2025 may be difficult to attain.”
