MNI South African Reserve Bank Review: January 2025 PDF Free Download
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Business Address – MNI Market News, 3rd Floor, 1 Great Tower Street, London, EC3R 5AA
MNI South African Reserve Bank Review: January 2025
Executive Summary:
• The SARB cut rates by 25bp, but its message was one of caution.
• There were two hawkish dissenters, a shift from previous unanimous votes.
• Key risks are assessed to stem from the external environment.
Key Links:
• MPC Statement
• Press Conference
• Forecast Report
Key Takeaways: Cautious About External Environment
The South African Reserve Bank (SARB) delivered a widely anticipated 25bp cut to the repo rate, bringing it
to 7.50%, closer to its modelled neutral level. The central bank was relatively satisfied with near-term
domestic inflation developments, projecting on-target headline and core inflation over the forecast horizon
and conceding that inflation expectations are now aligned with its objectives. However, the Monetary Policy
Committee (MPC) sharpened its language around medium-term risks, which it assessed to be skewed to the
upside and primarily rooted in the external environment. Against this backdrop, two policymakers called for
an on-hold rate decision, but a majority of four was enough to get another cut over the line.
South Africa’s central bank was almost universally expected to trim rates by 25bp this week. As explained in our
preview, a relatively benign inflation picture at home and the 50bp gap between the amount of easing delivered by
the Fed and the SARB in this cycle left the South African monetary authorities with ample space to loosen monetary
policy. In an incremental hawkish shift, the vote split changed to 4-2 after unanimous cuts at the two previous
meetings in November and September. The consensus call in a Bloomberg survey was for another unanimous
decision, with five out of nine economists pencilling in this outcome.
The tone of SARB communications turned more cautious, on balance. Admittedly, the Committee did strike some
optimistic notes on the domestic inflation picture. The statement noted that “in the near term, inflation appears well
contained,” with headline and core inflation expected to stay close to the target over the forecast horizon and inflation
expectations aligned with the SARB’s preferred levels. However, near-term optimism was coupled with medium-term
caution. The Committee changed its assessment of risks to the inflation outlook from “balanced” to “tilted to the
upside” and issued a relatively strong-worded warning that that “the medium-term outlook is more uncertain than
usual, with material risks from the external environment”.
MPC members seemed particularly concerned about the ramifications of protectionist policies of the new US
administration. They explicitly admitted that they “spent some time during this meeting reviewing a trade war
scenario”, in which a 10pp increase in US tariffs followed by retaliatory measures by other countries was modelled to
push USD/ZAR to a high of nearly ZAR21, boost domestic inflation to +5% Y/Y and result in a 50bp higher peak level
of interest rates relative to baseline forecasts. The relatively detailed discussion of this forecasting exercise suggests
that the rate-setting panel attached a relatively high weight to the risk of an escalation in trade frictions and its potential
repercussions.
Although the approval of lower than expected Eskom tariffs for 2025/26-2027/28 may result in a slightly lower inflation
trajectory, while the SARB admitted that accelerated structural reforms could create more space to ease monetary
policy, the MPC’s preference clearly remains to err on the side of caution. This calls into question the potential for
another cut as soon as in March, even if it cannot be ruled out. The SARB noted that further decisions will be made
“on a meeting-by-meeting basis, with no forward guidance and no pre-commitment to any specific rate path.” In our
view, further near-term monetary easing hinges on the materialisation of external risks and the performance of the
rand amid a risk of a pass-through to domestic price pressures.
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SARB Interest-Rate Forecast
Source: SARB
Analyst Views (Alphabetical Order)
Bureau for Economic Research: More Focus On Upside Risks To Inflation
• They write that even more than before, the SARB focused on the upside risks to inflation – especially over
the medium term, which is deemed more uncertain than usual.
Commerzbank: Deeper Cuts May Support ZAR In Long Term
• Commerzbank write that the South African Reserve Bank (SARB) cut its key interest rate by 25bp to 7.5%
at its meeting yesterday, but after inflation fell more than expected last week, the market was fully expecting
this decision.
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Business Address – MNI Market News, 3rd Floor, 1 Great Tower Street, London, EC3R 5AA
• Nevertheless, the ZAR benefited slightly yesterday as the SARB marginally altered the expected path of the
policy rate in its statement. In November, it was said that rates would fall further to 7.25%, but the new
target seems to be 7% now.
• Commerzbank note that in doing so, the SARB is accommodating their expectations of a stronger policy
cycle - they have long assumed that the policy rate would fall to 7% this year.
• They continue to believe that policy rate cuts will help the ZAR. A lower interest rate level in South Africa,
accompanied by lower and more stable inflation, should have a positive impact on investment and growth
and support the currency in the long term.
Goldman Sachs: Additional 25bp Cut Expected In March, Terminal Rate Seen At 6.50%
• They note that although the rate decision fell in line with expectations, the 4-2 split vote (with two hawkish
dissents) and (re)introduction of upside inflation risks represent a significant hawkish shift from the MPC.
• Forecast revisions themselves were relatively small, but the MPC notably shifted from an assessment of
balance to upside risks to the inflation outlook. The inflation forecast does not incorporate the lower
electricity tariff increase granted by the regulator to Eskom of 12.7%/5.4%/6.2% for 2025/2026/2027
(announced after the MPC decision), which compares to the standing SARB assumptions of 15%/10%/8%
over the next three years.
• Communication was clearly hawkish and focused on the external environment, particularly the outlook for
monetary policy in the US and risks relating to trade tariffs, both factors that in the MPC’s assessment have
contributed to a stronger US dollar. Accordingly, the SARB revised its starting point assumption for the
Rand weaker from ZAR17.96 as of the November MPC to ZAR18.45 vs. the USD. In contrast to hawkish
external factors, however, domestic developments have been unequivocally dovish.
• Despite concerns over the uncertain global outlook, the MPC opted to cut its policy rate by 25bp, albeit in a
split 4-2 vote among MPC members. It characterises this decision as “reducing the degree of policy
restrictiveness” and making the stance “somewhat more neutral”.
• Goldman’s inflation outlook remains more benign than the SARB’s, both in the near term and, especially, in
the medium term. Assuming their inflation outlook, they forecast an additional 25bp rate cut at the March
MPC meeting, followed by a pause and cuts at alternating meetings down to a 6.50% terminal rate.
• They view risks to this forecast as tilted towards a more backloaded and drawn-out cutting cycle. In their
view, the split vote and (re)introduction of upside inflation risks imply that the bar for holding rates at the
next meeting is set low. Incremental hawkish developments – especially on the external front, manifesting in
further currency weakness – would be likely to tip the balance within the MPC from a cut to a hold.
HSBC: Preparing For FX Shock
• If yesterday’s decision was widely expected and coherent with currently low inflation, the SARB has
appeared very concerned by the global uncertainties, in HSBC’s view. Therefore, the central bank has said
that it was not committing to any interest rate path, meaning that the next rate move would not
unnecessarily be a cut.
• Interestingly, the central bank outlined its risk scenario, if an adverse external shock were to materialise (i.e.
higher US rates, trade wars, surge of risk aversion, etc.). In such a scenario, the SARB sees a substantial
shock in the FX space with USD/ZAR rising to a record high of 21, inflation reaching 5% and a policy rate
up by 50bp compared to the central scenario. In its central scenario, the policy rate is seen at ~7.30% in the
next three years, i.e. near the current level.
• Based on its different projections, scenarios, and its traditional willingness to contain FX market volatility,
HSBC believe that the SARB has shifted to a “wait & see” stance from a loosening bias. It is worth noting
that two members voted for “no change”, probably because of the risks around an external shock and the
assessment that the policy rate is already close to the neutral rate.
• Overall, they believe that the SARB is getting ready for a FX shock by keeping the policy rate high (in
nominal and real terms) and is prepared to tighten further, if needed. For them, USD/ZAR should be closer
to 17.0 based on fundamentals. However, given the scale of the global risks, some undervaluation is
required with a spot closer to 18.0. Based on their valuation model, USD/ZAR at 21 (like in the SARB’s
shock scenario) would imply an unseen undervaluation.
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JP Morgan: Scrapping Call For Final Cut In 3Q25
• They write that although the MPC lowered the repo rate by 25bp to 7.50%, as expected, the decision was
tighter than anticipated. They thought the tone of the statement and Q&A shifted to hawkish, from cautious
in November, with the SARB warning that some of the global risks are materializing. The SARB also
explicitly modelled a trade war risk scenario, noted “material risks” for the external environment and
emphasized that it provided no forward guidance. As they had expected, the medium-term inflation risks
were viewed to the upside, although with balanced near-term risks.
• JP Morgan continue to expect the SARB to pause in March, but they remove the tentative final cut they had
pencilled in for 3Q25 as the bar set by the MPC appears high. They add that while domestic developments
could also be relevant (e.g. GNU frictions), the main risk is due to the global backdrop. The SARB explicitly
modelled a global trade war risk scenario with a 10% increase in US tariffs (and retaliatory measures by
other countries). Its models suggest that USD/ZAR could weaken to near 21 (vs. 18.60 assumption), raising
SA inflation and policy rate by 50bp relative to the base case. With the policy rate now near neutral, the
direction of the policy rate becomes less clear. In JP Morgan’s view, on balance, some room for incremental
further easing remains but this would likely require a continuation of inflation downside surprises in services
and USD/ZAR below 19.00-19.50 (as signalled previously).
Morgan Stanley: Lower Conviction On March Rate-Cut Call
• They write that the SARB lowered the policy rate to 7.50% today, as was widely expected. Less certain was
whether one or two dissenting votes would materialise, a risk they specifically highlighted in their preview
note. Ultimately, the vote was indeed split confirming that there has been a clear change in the appetite to
deliver further easing from here. The main source of risk appears to be uncertainty related to trade tensions
and what this means for global inflation and EMFX.
• Notwithstanding the more hawkish vote split, their Morgan Stanley Semantic Index scores the statement at -
0.16 vs -0.08 in November. When unpacking the topics, they find that the growth assessment is more
hawkish (output gap closing from -0.4% to 0.0%) but there are fewer hawkish inflation sentences (reflecting
the improved near term forecast). It could just be that the MPC chose to say less, and instead expressed
itself through the vote split.
• Risks to their longstanding view of a final reduction in the repo rate in March have clearly risen, and will be
driven largely by developments on the external front. Domestic factors could certainly justify additional
easing. The ZAR response to tariff announcements is key but now seems well captured by the SARB. Risk-
reward is therefore skewed toward a more benign outcome, in their view. Delivery of a US fed funds rate cut
in March would help.
Nedbank: Next Cut Now Expected Around Mid-2025
• Nedbank note that the expected 25bp cut was a split decision, with two members voting for no change in
rates. The decision was motivated by recent below-target inflation outcomes and a benign near-term
inflation outlook. However, the committee struck a cautious tone, warning that the medium-term inflation
outlook is ‘more uncertain than usual’’, with the external environment posing ‘material’’ upside risks. The
MPC was clearly worried about the more hawkish tilt in US monetary policy and its likely negative
implications for the rand’s future course.
• According to Nedbank, the underlying message of the MPC meeting is that the inflation and interest rate
outlooks are uncertain and face significant upside risks. The Committee appears to be setting the stage for
a shallow easing cycle and a likely pause in the meetings ahead. Fears of renewed rand weakness against
the backdrop of a more hawkish Fed seem to be main reason for cautious messaging. Since it would
probably take time for Trump’s policies to crystalise and even longer for the impact on inflation to emerge,
the Fed appears to be a signalling a prolonged pause in US interest rates. This would sustain interest rate
differentials in the US’s favour, potentially keeping high-risk emerging market currencies under pressure
and thereby reducing the monetary policy space available to their central banks.
• Nedbank still expect the SARB to follow through with another 25bp reduction in the repo rate, but it now
appears more likely around the middle of the year. There is an outside chance that the most significant
adjustments to Trump’s policies have already occurred, suggesting the rand could continue to trade in a
narrow band over the near term, in their view. At the same time, the other major drivers of domestic inflation
will likely remain relatively subdued. Global oil prices receded in recent weeks and will likely decline further
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Business Address – MNI Market News, 3rd Floor, 1 Great Tower Street, London, EC3R 5AA
as oil supply outpaces global demand. Although domestic demand picked up, the upturn was moderate and
largely matched by easing supply-side constraints.
