SARB resumes loosening cycle in May, as expected

Rates fall to an over two-year low: At its meeting on 29 May, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) resumed its loosening cycle after a brief pause in March and reduced its policy rate by 25 basis points to 7.25%. The cut, which brought cumulative reductions to 100 basis points over the last year, had been priced in by markets. The decision to cut was unanimous this time, although its size was not: One of the MPC’s six members preferred a 50 basis point reduction.

Improved inflation outlook and a disappointing economic performance drive cut: In terms of what drove the SARB’s decision, one key factor was headline inflation, which remained below the SARB’s 3.0–6.0% target band in April–May. Moreover, the inflation outlook has improved amid a stronger currency, lower oil prices and the recent scrapping of the VAT increase; the SARB cut its headline forecasts for 2025 and 2026 to 3.2% and 4.3%, respectively; similarly, it reduced its core inflation forecasts to 3.3% and 4.1%, respectively, for the same two years. 2027 projections for both metrics were also trimmed. Moreover, recent high-frequency data augurs a disappointing performance for the economy. This, along with weaker projections for global economic growth due to rising trade barriers, led the SARB to trim its domestic growth forecasts to 1.2%, 1.5% and 1.8% for this year, the next and 2027, respectively.

Additional cuts still in store: The SARB forecasts the repo rate to end this year marginally below 7.00%, a more dovish view compared to March’s forecast of 7.25%. The SARB will reconvene on 31 July. Most of our panelists see 25–75 basis points of additional cuts by December, while the rest see rates on hold. Our Consensus is for the rate to end 2025 at 7.00%.

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