Repo rate: Will Reserve Bank cut or err on side of caution?

The Citizen

23-05-2025

With inflation at 2.8% in April and the rand currently trading under the psychological divide of R18/$, will the Reserve Bank cut the repo rate?
Although economists have been warning that the Reserve Bank will probably not cut the repo rate and rather leave it unchanged on Thursday, there have been calls for a cut after the inflation rate for April was again far below the bottom of the inflation target.
Lisette Ijssel de Schepper, chief economist at the Bureau for Economic Research (BER), expects that there will surely be lively discussions among members of the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) and that it is unlikely to be a unanimous decision.
'While a strong case can be made for further easing as price pressure remains subdued with a relatively benign inflation outlook as the economy is under pressure, we believe the Sarb may again err on the side of caution and keep its rate unchanged.
'When thinking about Sarb decisions in recent months, we started to talk about what the Sarb is likely to do, but this is not always the same as what the Sarb could or even should do. Our decision would have been to cut a bit more aggressively at the start – but then hindsight is 20/20, of course.'
She points out that the Reserve Bank of Australia (RBA) cut rates for a second time this year on Tuesday to a two-year low, despite warning about heightened global uncertainty. 'However, with inflation around target and risks seen as balanced, a cut was seen as appropriate, and there is a chance the Sarb agrees with respect to South Africa.'
ALSO READ: Inflation for April only 2.8%: Is a repo rate cut coming next week?
Nedbank economists: Sarb will leave repo rate unchanged
Nicky Weimar and Johannes (Matimba) Khosa, economists at the Nedbank Group Economic Unit, think fear of the unknown will likely keep interest rates on hold. 'We expect the MPC to leave interest rates unchanged. However, it is a difficult one to call.
'MPC members were divided on the past two decisions. As we see it, the decision hinges on how much weight the MPC places on recent price dynamics compared to potential upside risks posed to the inflation outlook by a highly unpredictable global environment.
'If the focus falls on the underlying price dynamics, a strong case can be made for further rate cuts. Recent inflation outcomes have been benign. Inflation increased slightly to 2.8% in April but remained well below the Sarb's 4.5% target.'
Weimar and Khosa say the upside risks also subsided since the last meeting in March where the MPC decided to keep the repo rate unchanged. They still see food prices increasing, but point out that a healthy summer harvest will partly contain the impact of higher global food prices.
'Our central forecast is for rates to remain unchanged for the rest of this year. However, if the US Fed cuts rates later this year, the MPC could easily follow without placing undue pressure on the rand.
ALSO READ: What does lowest inflation in 5 years mean for repo rate?
FNB economists: Sarb will leave repo rate unchanged
Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say while the global environment has become less tense, they still believe that persistent policy uncertainty will continue to push monetary authorities to err on the side of caution.
'However, there is ample room for further easing given weak domestic fundamentals, so it will be interesting to see which way the MPC leans. We expect the MPC to keep interest rates unchanged. While we think more cuts will come in the second half of the year, a repo rate cut of 25 basis points, which is the consensus view, would not be too much of a surprise and would suggest that local fundamentals outweighed external headwinds.
'The other factor that could keep the MPC on hold is a shift to a lower inflation target. The immediate aim of restrictive policy would be to guide inflation expectations even lower and embed inflation that is currently at the bottom of the inflation target range.'
ALSO READ: What lowering the inflation target will mean for SA
Citadel economist: Surprise repo rate cut is unlikely based on previous decisions
Maarten Ackerman, chief economist at Citadel, also believes that the Sarb is likely to hold the repo rate as caution remains the order of the day. 'The Sarb will maintain a cautious, wait-and-see approach amid ongoing global and domestic uncertainty, including risks stemming from US trade policy and the broader impact of tariffs.
'Although inflation is well-behaved and below the mid-point of the target range, the Sarb has consistently taken a cautious stance. They are monitoring the global landscape, especially risks tied to US inflation, interest rate differentials and rand volatility, before making any moves.'
He notes that while other central banks, such as the European Central Bank (ECB) and Bank of England (BoE) have shown signs of easing, the Sarb is more focused on maintaining stability relative to the US dollar, to preserve the attractiveness of local assets and prevent further rand weakness.
'A surprise rate cut could lift consumer sentiment, but is unlikely given the Sarb's transparent communication and conservative track record. If they have not acted in previous windows of opportunity when inflation was low, it is unlikely that they will surprise now.
'In the face of market volatility, a clear and credible fiscal roadmap alongside monetary stability will be key to positioning South Africa for recovery and resilience in the months ahead.'