By: Johann Els, Chief Economist at Old Mutual Group

The South African Reserve Bank’s Monetary Policy Committee (MPC) is expected to implement a 25-basis point interest rate cut in its upcoming meeting this week. This decision is driven by persistently low inflation rates, declining inflation expectations and a somewhat stabilised rand against the backdrop of uncertain U.S. trade policies.

Johann Els, Chief Economist at Old Mutual Group, highlighted the favourable economic indicators supporting the rate cut. “December’s CPI inflation data came in significantly below expectations at 3.0%, with all major components showing subdued price pressures. This, coupled with lower inflation expectations and a relatively stable rand, creates a conducive environment for the SARB to reduce rates,” Els stated.

The recent CPI report revealed that rental and owner’s equivalent rent (OER) inflation were notably lower than anticipated, easing to 2.8% and 2.4% year-on-year, respectively. Additionally, food and consumer goods inflation remained below the bottom end of the 3% to 6% target range, further alleviating concerns about upward price pressures. Els emphasised that these trends indicate minimal demand-driven inflationary risks, providing the MPC with the necessary confidence to proceed with the rate cut.

“While the rand has experienced volatility due to ongoing uncertainties surrounding U.S. tariff policies under President Trump’s second administration, the lack of immediate tariff increases has alleviated some market concerns. This stabilisation of the rand, combined with lower-than-expected inflation, supports the case for a measured rate reduction,” Els added.

The anticipated rate cut aligns with the broader economic strategy to boost growth by reducing borrowing costs in an environment where inflation remains well below the mid-point of the Reserve Bank’s target range. Els also noted that the SARB’s decision may be accompanied by a hawkish commentary addressing the potential risks posed by external factors, including U.S. trade policies and their impact on the rand.

“Even though we expect a rate cut this week, the SARB is likely to issue a cautious statement that highlights the risks associated with U.S. policy shifts and their potential effects on the rand and inflation. This balanced approach ensures that the Reserve Bank remains vigilant against any unforeseen inflationary pressures,” Els explained.

Looking ahead, Els anticipates that the Reserve Bank may continue to adjust rates as new economic data emerges. “With up to three more potential 25 basis point rate cuts in 2025, the MPC will need to stay agile, closely monitoring indicators such as currency moves, inflation expectations, and price trends to guide future monetary policy decisions.”

The upcoming MPC meeting will also consider the implications of the recently signed Expropriation Bill, which, despite introducing some volatility, includes strong protections for property owners and should not significantly deter investor confidence. According to Els, while the bill adds a layer of uncertainty, the overall economic fundamentals remain robust enough to support the Reserve Bank’s current policy trajectory.

As the global economy finds ways to deal with the complexities of U.S. trade policies and their ripple effects, South Africa’s monetary policy stance appears poised to adapt, balancing domestic economic stability with external economic pressures.