Pretoria: The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has decided to reduce the repo rate by 25 basis points, with effect from 31 January 2025. Four members preferred this action, while two supported an unchanged stance. The committee ultimately agreed that it was possible to reduce the degree of policy restrictiveness, making the stance somewhat more neutral. However, all members were concerned about the uncertain global outlook, SARB Governor Lesetja Kganyago said on Thursday.
According to South African Government News Agency, delivering the first Monetary Policy Committee statement for 2025, Governor Kganyago noted that consumer prices and headline inflation averaged 4.4% last year, near the middle of the target range. Inflation slowed to 3% in December, having started the year above 5%, mainly due to favorable goods-price developments, including food inflation reaching 15-year lows, as well as lower fuel costs.
Because of these transitory factors, inflation is likely to remain in the bottom half of the target range through the first half of this year. But headline inflation should revert to around 4.5% thereafter, aided by core inflation which remains at or below the midpoint over the forecast horizon. According to the most recent survey, inflation expectations have also largely aligned with the midpoint objective.
The risks to the inflation outlook are assessed to the upside. In the near term, inflation appears well-contained. However, the medium-term outlook is more uncertain than usual, with material risks from the external environment. Domestic factors such as administered prices are also problematic, Kganyago said.
The forecast sees rates drifting slightly lower over the next few years, stabilizing near 7.25%. However, the rate path from the Quarterly Projection Model remains a broad policy guide. The MPC emphasized that its decisions will be made on a meeting-by-meeting basis, with no forward guidance and no pre-commitment to any specific rate path. Such decisions will continue to be outlook-dependent, responsive to data developments, and sensitive to the balance of risks to the forecast.
Given the challenging global environment, the MPC reviewed a trade war scenario during the meeting. This featured a universal increase of 10 percentage points in US tariffs, with retaliatory measures by other countries. The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets. In response, the model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher, at its peak, relative to the baseline forecasts.
The committee also considered a scenario of accelerated structural reforms domestically. This showed growth picking up gradually, reaching 3% in 2027, with lower inflation and lower interest rates, demonstrating how structural reforms can reduce the country risk premium and create more monetary policy space.
Considering the difficulties of the external environment, the Governor emphasized the importance of sustaining domestic reform momentum while protecting macroeconomic stability. The MPC’s main contribution is to deliver low and stable inflation, with well-anchored inflation expectations. The committee remains vigilant and ready to recalibrate policy as needed.
Additional measures that could improve economic conditions include reaching a prudent public debt level, further repairing and strengthening network industries, lowering administered price inflation, and keeping real wage growth in line with productivity gains, Governor Kganyago concluded.