South Africa’s 2.7% Inflation Rate Surprises Economists — But Will the Reserve Bank Cut the Repo Rate?
South Africa’s Inflation at 5-Year Low: What This Means for the Repo Rate
Repo Rate link to Inflation: South Africa’s economy hit an unexpected milestone in March 2025 — the inflation rate plunged to 2.7%, the lowest recorded figure in nearly five years. While this news sparked cautious optimism among consumers and economists alike, the looming question remains: Will the South African Reserve Bank (SARB) respond by cutting the repo rate?
Understanding the Repo Rate & Inflation Link
The South African Reserve Bank has a constitutional mandate to maintain price stability, using the repo rate—the interest rate at which it lends money to commercial banks—to influence inflation. The current inflation target range set by National Treasury in consultation with SARB is between 3% and 6%.
With March’s 2.7% inflation rate falling below the lower band, there’s speculation about whether the SARB’s Monetary Policy Committee (MPC) might initiate another rate cut at its next meeting. But the picture is more complex than it seems.
Inflation Is Low — But So Is Economic Confidence
According to Jee-A van der Linde, senior economist at Oxford Economics Africa, the inflation rate aligns with Q1 forecasts, but it’s lower than expected. This may lessen the anticipated impact of the 0.5% VAT hike scheduled for 1 May, especially with the expanded list of zero-rated food items proposed by National Treasury.
However, consumer confidence has fallen sharply in early 2025. Retail sales also dipped in February, signalling cautious household spending — a key driver of South Africa’s modest economic growth.
Why a Repo Rate Cut May Not Be Immediate
While low inflation theoretically opens the door for rate cuts, SARB may hold off due to several counterweights:
- Geopolitical uncertainty: The ongoing global trade tensions, notably around US tariffs, have stirred financial markets.
- VAT increase impact: Although muted, any rise in indirect taxes could still lift inflation in the months ahead.
- Rand volatility: Despite trading at around R18.55 to the US dollar, the local currency remains vulnerable to global shocks, making a premature rate cut risky.
FNB’s Koketso Mano warns that while inflation may hover at 2.7% in April, rising food prices and fading base effects could push it upward from May. She suggests that SARB may delay repo rate adjustments until global risks subside.
What Economists Are Saying
According to Nedbank’s economists, while inflation is tame and likely to remain so through 2025 (with forecasts revised down to 3.6%), the repo rate might only be cut if the rand remains stable and global conditions improve.
Standard Bank’s Dr Elna Moolman agrees that benign inflation supports SARB’s cautious stance but emphasizes that medium-term risks from a weaker currency and tariff impacts still loom.
Meanwhile, Prescient Securities’ Kristof Kruger sees potential for a repo rate cut by November, depending on how the April inflation data unfolds. Markets, he says, are already pricing in a modest 50 to 75 basis point cut.
So, What Could Happen Next?
- If April inflation stays below 3%, SARB may open the door to gradual repo rate reductions by late 2025.
- However, VAT hikes, electricity tariffs, and food inflation could reintroduce upward pressure on prices.
- The global economic climate—especially US-China trade dynamics—will heavily influence SARB’s timing.
South Africa’s inflation dip to 2.7% is a silver lining in an otherwise murky economic outlook. While consumers may hope for lower borrowing costs, the repo rate decision hinges on far more than inflation alone. For now, the Reserve Bank is expected to watch and wait, balancing cautious optimism with global economic realities.
Also read: Godongwana Defends VAT Hike as Only Option Amidst Budget Deadlock in South Africa
