The world economy is experiencing extraordinarily high uncertainty. Economic fault lines, stemming from policy shifts and heightened trade tensions, have emerged, adding to pre-existing geopolitical tensions.

These shocks present new risks to both growth and inflation, and have rendered the global economic outlook more difficult to predict. US economic data, particularly consumer and business sentiment as well as stocks, has softened unexpectedly and the US dollar has weakened, while inflation remains relatively stubborn. Meanwhile, stimulus measures in Germany and China could see growth strengthen in these economies, narrowing the growth divergence of the past year among the world’s largest economies. 

Global headline inflation is expected to moderate further this year and the next, but confidence is now lower. Core inflation in advanced economies remains above targets, while inflation has been elevated in some emerging economies owing to strong demand, fiscal concerns and currency weakness. The combination of persistent services inflation and potential tariff-induced price increases presents material upside risks to global inflation.

Central banks are expected to remain cautious due to increased inflation risks and the potential rise in neutral interest rates. Modest further cuts by major central banks are, however, still projected for this year, but policy rates will likely remain higher for longer. With global interest rates high and risks elevated, the possibility for further rate cuts in emerging economies is limited as interest rate differentials narrow.

Inflation in South Africa is currently contained, and the outlook appears moderate and in line with the 4.5% target midpoint. However, the uncertainty around this outlook has risen markedly since the beginning of the year due to global and domestic risks, particularly heightened geopolitical and trade tensions as well as the proposed VAT increases. The VAT impacts are difficult to quantify in advance as they depend on an unknown pass-through rate and are staggered, which raises the risk of second-round effects.

The MPC lowered the policy rate by 50 basis points over the six-month period from October 2024 to March 2025, bringing it closer to its estimated neutral level. The QPM suggests one more 25 basis point rate cut in the second quarter of this year. Financial markets and economic analysts broadly agree with this assessment, although rate expectations in Forward Rate Agreements have exhibited some volatility. However, with risks and uncertainty unusually high, policy calibration will likely remain data- dependent, while also underpinned by scenario analysis.

The South African economy recorded disappointing growth over the past two years, mostly reflecting serious bottlenecks in the energy and logistical sectors. While notable progress has been achieved in stabilising these sectors, they may continue to drag on economic activity for some time. These hysteresis effects are exacerbated by competitiveness factors, including elevated long-term borrowing costs as well as high costs of production skills, gaps and red tape, the materiality impact of which is becoming increasingly evident.

To ensure growth is more robust and resilient to shocks, domestic investment needs to rise significantly to rebalance the economy and complement household consumption spending. Investment and output growth can be boosted further by adopting policy measures that permanently lower inflation risk and strengthen competitiveness.

Watch the release of the MPR below: