SARB interest rate easing cycle likely coming to an end, says Absa

The South African Reserve Bank (SARB) interest rate easing cycle is nearing its end after it decided to keep the repo rate unchanged.

This was the caution from Absa Corporate and Investment Banking (CIB) economics team on Tuesday as they presented their perspectives for the first quarter of 2025.

The Sarb’s Monetary Policy Committee (MPC) last week decided to keep the repo rate on hold at 7.50% after cutting rates by a cumulative 75 basis points since September last year.

This was in line with consensus and against market expectation of a 25 basis points cut.

Absa chief economist Miyelani Maluleke said the PMC’s decision to hold interest rates implied the cutting cycle could be over.

Maluleke said the MPC expressed concern about escalating trade tensions, geopolitical relationships that are changing ‘abruptly’, a global outlook that was ‘unpredictable’ as well as domestic uncertainty.

“Although the Sarb lowered its inflation forecasts relative to January, the committee stressed that upside risks to the medium-term inflation outlook and elevated uncertainty warranted a cautious approach. In the context of [this] decision, it is difficult to see how a strong argument for further rate cuts will emerge in the near-term,” he said. 

“The risks that the committee has identified seem unlikely to be temporary, in our view. Moreover, except for what we expect to be sideways moves between March and May, headline inflation looks set to drift higher from the second half and we see it around the mid-point of the target range by year-end. 

“In addition to this, we see the monetary policy stance as only marginally restrictive. As such, we adjust our baseline forecast and now expect no further rate cuts. That said, given the high levels of uncertainty, shocks that may move rates in either direction are not impossible to imagine.” 

Absa said that inflation pressures will remain contained for the remainder of the year after headline inflation was unchanged at 3.2% year-on-year in February.

Absa said it was adjusting its CPI inflation forecast profile to account for several factors, including the lower-than-expected starting point, a bigger-than-anticipated fuel price cut in April, and Nersa’s electricity tariff announcement this week have a dampening effect on our headline forecast. 

However, we also adjust our forecast for the announced VAT increase. 

“We now forecast headline CPI inflation for 2025 at 3.7%, 0.3 percentage points lower, and unchanged for 2026 at 4.6%,” Absa said. 

Meanwhile, Maluleke said they were expecting economic growth to improve as headwinds have abated, with improvements in electricity and logistics infrastructure having largely been sustained. 

Maluleke said more recent cyclical constraints including inflation had been subdued, supporting a recovery in household finances and propping up economic activity and private sector confidence. 

“Although our 2024 GDP growth forecast is 0.4 percentage points lower at 0.6% since the last Quarterly Perspectives mainly due to a sharp drop in agriculture output, our medium-term growth forecasts are broadly unchanged. We forecast real GDP growth of 2.1% for 2025 and 2026,” he said.

“We do not think structural reforms have hit a ceiling as yet. There’s certainly a lot that has been achieved under Operation Vulindlela. But reforms need to accelerate to generate further improvements in the rail network, ports, last-leg water supply and the functioning of municipalities more broadly.”

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