By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
At its January 2025 meeting, the Monetary Policy Committee (MPC) lowered the repo rate by another 25 basis points (bps), bringing it down to 7.5%. This marks the third consecutive 25bp cut since the start of the cutting cycle in September last year. While this highlights the MPC's comfort with the inflation trajectory over the medium term, the outlook on interest rates is uncertain. Tighter monetary policy in the United States (US) and upside inflation risks could limit the MPC's room to manoeuvre. The voting split showed two committee members already willing to pump the breaks on the cutting cycle and if this is anything to go by, we could have a pause sooner rather than later.
Global considerations
In the US, the Fed decided to keep interest rates unchanged at their January meeting, pausing after 100bps worth of cuts were delivered in the latter part of 2024. This decision came on the back of resilient activity and sticky inflation, which could be exacerbated by trade restrictions, looser fiscal policy (on a net basis), and tighter labour supply. Should these risks materialise, the likelihood of a Fed rate hike would increase. The market expects a resumption of the cutting cycle in 2H25, which should move policy to a more neutral stance and create more space for South Africa (SA).
The US outlook is quite divergent from the Euro Area, where structurally weak growth should continue to push the European Central Bank (ECB) to cut interest rates. It delivered another 25bps cut at its January meeting, with rates over 150bps down in the current cycle. That said, the ECB will have to balance the risk of higher inflation from a potential trade war with the US and higher fiscal spending for defence purposes against weak productivity and demand. As things stand, the ECB is expected to shift to an accommodative stance before year-end.
China's growth is expected to improve this year, but excess capacity and a disinflationary impulse could be upheld by restricted access to western markets. This could be positive for importers of Chinese goods, but frictions during the recalibration of trade relations could worsen near-term risk sentiment.
Local considerations
SA's economic growth was weak in 3Q24 but is likely to rebound going into 2025, driven by improved activity in some productive sectors and increasing demand. The economy's potential to grow should increase over the forecast, supported by ongoing structural reform. The SARB expects activity to rise alongside its capacity and the output gap should remain broadly closed. Risks to this outlook are seen as balanced.
Inflation and surveyed expectations have slowed materially - supported by declining goods inflation. Inflation is expected to remain below target in 1H25, but to rise in 2H25 as transitory factors fade and administered price inflation rises. Nevertheless, the SARB expects core inflation to remain muted and headline inflation to remain anchored at 4.5% over the forecast horizon. While core inflation should reflect the effectiveness of restrictive monetary policy in containing demand pressures, we are concerned that a cash injection from retirement pot withdrawals and improved consumer sentiment amid compressed supplier margins could embolden the normalisation in services inflation. We acknowledge that the medium-term outlook is clouded by unfolding global secular risks but think that SA's structural reform could insulate local dynamics - the SARB scenario analysis aligns with this view.1Therefore, we think that there is more upside risk to the SARB's near-term inflation forecast rather than the outer forecast.
The bottom line
This month's interest rate cut came as expected. However, the MPC's tone was relatively hawkish, and a pause could be in sight, especially with the Fed's stance narrowing policy space. The latest Quarterly Projection Model (QPM) outlook sees rates settling above 7.0% and while this is only a broad guide for the MPC, it challenges our view that policy becomes neutral by year-end.
Week in review
The leading business cycle indicator expanded further by 0.6% m/m in November 2024, slowing from the 1.1% increase recorded in October. The rise was driven by positive contributions from five of the ten constituent variables, with the largest boost coming from an acceleration in trend growth in new passenger vehicle sales and an improvement in the RMB/BER Business Confidence Index. However, the indicator faced headwinds from a slowdown in trend growth in real Money Supply (M1) and a decline in South Africa's U.S. dollar-denominated export commodity price index. Despite the slower monthly increase, the leading indicator rose 2.4% y/y, up from 1.9% y/y in October, marking the eighth consecutive month of annual growth. This aligns with our view of an economic upturn, with growth expected to recover from below 1% over the past two years to nearly 2% in 2025/26.
Private sector credit extension (PSCE) slowed for a third consecutive month in December, to 3.8% y/y from 4.2% in November. Household credit recorded 3.0% y/y, slightly lower than the 3.1% growth in November. Lending activity is particularly weak in the unsecured credit space, with general loans and advances contracting by 1.5% y/y, marking the nineth consecutive month of decline. Overdrafts too remain weak, only registering a meagre 0.03% growth, from a contraction of 1.0% in the previous month. Asset-backed credit depicts mixed trends. Car finance credit remains a bright spot (although it slowed to 6.5% from 7.1%), while mortgage lending remains in the doldrums, registering 2.3%, virtually unchanged from the previous month. While home buying activity has shown signs of recovery in recent months, this has not translated into stronger mortgage advances, aligning with our view that there are still remnants of buyer caution in the market, despite improved conditions.
Corporate credit remained steady at 5.4% y/y in December, supported by an acceleration in commercial mortgages (5.3% from 4.9%) and general loans (from 4.9% to 5.3%). Pulling in the opposite direction were commercial vehicle finance (from 5.9% to 5.2%) and overdrafts (from 8.9% to 5.9%).
Overall, PSCE averaged 4.0% in 2024, down from 6.0% in the previous year. We expect the improving demand conditions, characterised by lower borrowing costs and continued reform agenda, to support stronger demand and supply of credit in 2025.
Producer inflation exited a two-month deflationary trend as expected, rising to 0.7% y/y in December. Monthly inflation edged up to 0.2% from 0% in the prior month, driven by increases in petrol (0.4% m/m), diesel (3.1% m/m), and food (0.2% m/m). Excluding petroleum-related products, producer inflation moderated to 2.3% y/y from 2.6% y/y in October. Intermediate producer inflation, which tracks input costs in the production process, rose slightly to 5.8% y/y (0.6% m/m) from 5.7% y/y (0.4% m/m), reflecting persistent cost pressures and a low base from 2023. On average, producer inflation stood at 3.1% in 2024, down from 6.7% in 2022. We expect inflation to remain subdued in 2025, supported by stable oil and commodity prices. However, risks remain, particularly from potential rand depreciation amid a stronger U.S. dollar and global trade uncertainty, which could pressure producer costs.
Week ahead
The week will kick off with the Manufacturing PMI on Monday. In December, the PMI fell to 46.2, indicating a contraction for the second straight month and averaging 49 in 4Q24. This decline reversed the positive momentum from earlier in the quarter. Key indicators like business activity and new sales orders plummeted, with some respondents reporting worse-than-usual December conditions. Export sales also dropped significantly. Supplier deliveries slowed, likely due to ongoing logistical issues rather than increased demand. Worryingly, the employment index remained in contraction for the ninth month in a row. Despite a weaker rand and higher fuel prices, the purchasing price index surprisingly decreased. On a positive note, manufacturers remained optimistic about the near future, with the expected business conditions index rising significantly by 5.2 points to 67.6.
Also on Monday, NAAMSA's new vehicle sales data for January will be released. Vehicle sales totalled 41 092 units in December 2024, reflecting a 1.9% increase (779 units) compared to December 2023. The passenger car market performed well, with a 7.5% y/y increase in sales. Trends in the commercial vehicle segments were mixed. Light commercial vehicle sales experienced a 10.3% decline, while the medium commercial vehicle segment registered a robust 9.3% y/y gain. Heavy commercial vehicle and bus sales also saw a substantial 11.3% y/y decline. Passenger cars were the only segment to register an improvement in sales in 2024, at around 1.1%, reflecting relatively subdued investment conditions. Nevertheless, according to NAAMSA, the improved consumer and business sentiment, driven by better economic indicators and ongoing reforms, should support single-digit growth in the overall vehicle market in 2025.
On Thursday, electricity production data for December will be released. In November, electricity production increased by 6.6% y/y, reflecting an acceleration from 2.7% y/y in October. On a monthly basis, production increased by 0.8% m/m (seasonally adjusted), and in the three months to November, it was also up 0.8%, suggesting a likely positive contribution to 4Q24 GDP growth. The upcoming December data will provide a clearer picture of the sector's overall impact on GDP. Consistent with the suspension of load-shedding for over 300 days since March last year, electricity production increased by 4.9% in the first nine months of 2024.
On Friday, gross foreign reserve data for January will be released. In December, gross foreign reserves stood at $65.46 billion, slightly down from $65.86 billion in November. The decline was partly due to a moderate drop in gold reserves, driven by a lower U.S. dollar gold price. Additionally, foreign exchange reserves fell marginally, reflecting government-related foreign exchange payments.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 28 Jan | SA | Leading indicator | Nov | 114.7 | 114.1 |
| 30 Jan | SA | Private Sector Credit Extension % y/y | Dec | 3.8 | 4.2 |
| SA | PPI % y/y | Dec | 0.7 | -0.1 | |
| SA | PPI % m/m | Dec | 0.2 | 0.0 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 3 Feb | SA | Absa Manufacturing PMI | Jan | -- | 46.2 |
| SA | Naamsa Vehicle Sales %y/y | Jan | -- | 1.9 | |
| 6 Feb | SA | Electricity Production % y/y | Dec | -- | 6.6 |
| 7 Feb | SA | Gross Foreign Exchange Reserves $billion | Jan | -- | 65.5 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 85,685.49 | 2.1% | 2.1% | 14.8% |
| USD/ZAR | 18.59 | 0.5% | -1.1% | -1.1% |
| EUR/ZAR | 19.32 | 0.2% | -1.4% | -5.2% |
| GBP/ZAR | 23.09 | 1.0% | -2.1% | -3.3% |
| Platinum US$/oz. | 971.33 | 2.6% | 7.4% | 4.8% |
| Gold US$/oz. | 2,794.59 | 1.4% | 7.2% | 37.2% |
| Brent US$/oz. | 76.87 | -1.8% | 3.3% | -7.2% |
| SA 10 year bond yield | 9.67 | -0.6% | -0.2% | -9.2% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 0.7 | 1.9 | 1.9 | 2.2 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.0 | 2.2 | 2.2 | 2.4 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -3.2 | 3.8 | 3.5 | 4.9 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.4 | 4.4 | 4.5 | 4.5 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.0 | 4.9 | 4.8 | 4.5 |
| Repo rate (year end) %p.a. | 7.00 | 8.25 | 7.75 | 7.00 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 10.50 | 11.75 | 11.25 | 10.50 | 10.50 | 10.50 |
| USDZAR (average) | 16.40 | 18.50 | 18.30 | 17.80 | 17.90 | 17.60 |
