South African Reserve Bank (Sarb) Governor Lesetja Kganyago. The Sarb is now expected to keep the cost of borrowing on hold at 7.5% per annum on Thursday as the consumer inflation is forecast to continue to drift higher off a low base in the months ahead.
Image: Simphiwe Mbokazi / Independent Newspapers.
The South African Reserve Bank (Sarb) is anticipated to maintain its current interest rate at 7.5% per annum on Thursday, as it takes a measured approach to assess the potential ramifications of an impending value-added tax (VAT) increase.
This decision comes amidst predictions of rising consumer inflation, which is expected to persist its upward trajectory in the forthcoming months.
With economic pressures mounting, many are looking towards the Sarb's next moves as a litmus test for the ongoing cost-of-living crisis affecting households across the nation.
The looming VAT hike, designed to bolster government revenue, raises questions on how it might influence day-to-day consumer spending and, ultimately, inflation rates.
This comes as the annual headline consumer price inflation in South Africa showed resilience in February, remaining unchanged from January at 3.2%.
This steady print represented the highest inflation level seen in four months, with inflationary pressures primarily stemming from increased production costs, according to Statistics South Africa (Stats SA) on Wednesday.
Despite this uptick, the inflation rate still comfortably sits below the Sarb’s target midpoint of 4.5%, giving the bank’s Monetary Policy Committee (MPC) some breathing space as it makes the second interest rates decision for the year.
In January, the MPC reduced the policy rate by 25 basis points to 7.5% on slower inflation and forecast that rates would drift slightly lower over the next few years, stabilising near 7.25%.
The US Federal Reserve was on Wednesday also expected to keep the federal funds rate unchanged at 4.25%-4.5% during its meeting, extending the pause in its rate-cut cycle that began in January.
FNB senior economist, Koketso Mano, said the coming months may witness several factors influencing inflation trends.
Key among these are the fading of base effects, an expected increase in consumer spending, and the looming impact of a Value-Added Tax (VAT) hike—all of which are anticipated to push inflation rates higher as the year advances.
Mano said, fortunately, inflation expectations remained anchored, with the latest BER survey result for the first quarter of 2025 showing inflation averaging 4.6% across various time horizons.
“This should allow monetary policy the space to continue to loosen its noose on the economy, shifting more towards a neutral stance by year-end – we see that neutral level at 7.0%,” Mano said.
“We do not think that the next cut will be at the March meeting, as global volatility unfolds, but another cut is probable before the end of the first half of 2025.”
As South African consumers navigate these shifting economic conditions, the current inflation landscape continues to be characterised by varied pressures across different sectors, urging both policymakers and consumers to remain vigilant.
Stats SA reported that the inflation rate for food and non-alcoholic beverages ticked up to 2.8% in February, up from 2.3% January.
Key food categories such as fruit and nuts, vegetables, hot beverages, seafood, meat, and cereals experienced significant rises in price, contributing to the overall inflationary trend.
However, cold beverages, milk, dairy products, eggs, oils and fats, as well as sugar, confectionery and desserts, all recorded slower inflation in February.
On a monthly basis, consumer inflation saw a notable increase of 0.9% in February, marking the highest rise in a year, a sharp jump from the 0.3% increase recorded in January.
Notably, consumer prices for meat remained static when compared to January, with a monthly change of 0% and an annual rate also holding at 0%. This stability in meat prices is somewhat counterbalanced by the ongoing escalation of inflation for hot beverages.
Meanwhile, core inflation—which excludes food, non-alcoholic beverages, fuel, and energy—fell to 3.4%, its lowest since December 2021.
Nedbank economist, Johannes (Matimba) Khosa, said the rise in inflation will emanate from various sources, but goods inflation, principally food and fuel, will take the lead.
Khosa said US President Donald Trump’s tariffs will also contribute to global inflation, which, combined with a weaker exchange rate, will raise imported food inflation.
“Despite the anticipated upward trend, headline and core inflation will remain below or around the Sarb's 4.5%target for most of the year, with no evidence of significant demand pressure. We forecast headline inflation to average 4%in 2025, down from 4.4% in 2024,” Khosa said.
“Today's figures show that inflation remains contained. However, we believe the MPC will likely keep interest rates unchanged, focusing on the upside risks to the inflation outlook emanating from the threat posed to the rand, sticky global inflation and the increasing likelihood of a prolonged pause in US interest rates.”
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