Statement of the Monetary Policy Committee

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank

Published on 20 March 2025

The world economy is experiencing extreme levels of uncertainty. Trade tensions have escalated, and longstanding geopolitical relationships are shifting abruptly. In these circumstances, the global economic outlook is unpredictable. Germany has set out plans for large investments in security and infrastructure, which are likely to lift European growth. Meanwhile, China has announced new stimulus measures to bolster demand.

In the United States, economic sentiment is volatile. The year started with surging stock prices and a stronger dollar. More recently, however, the disruptive effects of tariffs and policy uncertainty have come into focus. Growth expectations have now slipped, the dollar has weakened, and US stock markets have given up recent gains. By contrast, asset prices in other economies have been resilient, with most major currencies strengthening against the dollar.

Inflation in advanced economies remains elevated, with both headline and core above 2% in the United States, the Euro area, the United Kingdom and even Japan. Some policy adjustments by major central banks are still expected this year, but rates are likely to remain high for longer, given new inflation risks.

Turning to South Africa, growth picked up in the fourth quarter of last year. As expected, the uptick was led by the household sector, boosted by lower inflation and withdrawals from the Two-Pot pension system. That said, the overall growth picture was disappointing, with other sectors showing weakness. Growth for 2024 as a whole was 0.6%, marginally below our expectations, and slightly worse than in 2023.

We have now revised down our 2025 growth forecast slightly, to 1.7%, while leaving the outer years unchanged. We attribute lower growth partly to subdued demand, and partly to lingering supply-side fragilities.

We assess that the risks to growth are to the downside.

Moving to prices, while inflation is still in the bottom half of our target range, it has edged higher over the past few months. We continue to see low inflation for goods, which is likely to be temporary. Services inflation is somewhat higher, but still below the 4.5% target midpoint. Inflation expectations are close to the midpoint. For now, inflation appears contained.

In terms of the outlook, the current forecast had more moving parts than usual, including a reweighting of the Consumer Price Index by Statistics South Africa, and the proposed Value Added Tax (VAT) increases announced in the Budget. We also adjusted assumptions such as the oil price, to reflect shifts in global markets.

The overall result of these changes is a marginally lower inflation outlook, with headline now projected at 3.6% this year and 4.5% next year. This is mainly due to the better fuel-price projections. It also reflects a more benign path for administered prices, given the lower electricity tariffs announced by NERSA in February. These factors offset pressure from the proposed VAT increases, which we think will add about 0.2 percentage points to headline inflation.

We see risks to this forecast on both the upside and the downside, with the balance of risks in the medium term skewed to the upside.

Against this backdrop, the MPC decided to keep the policy rate unchanged, at 7.5%. Four members preferred this action, while two favoured a cut of 25 basis points.

For several quarters we have enjoyed rising confidence in South Africa, with a smaller country risk premium and lower bond yields. However, the global economy is not on a stable footing and there are also domestic uncertainties, which put these favourable trends at risk. This calls for a cautious policy approach. 

As before, the forecast sees rates stabilising at a neutral level of about 7.25%. This rate path from the Quarterly Projection Model remains a broad policy guide. The MPC would like to emphasise that its decisions will be made on a meeting-by-meeting basis, and will continue to be outlook dependent, responsive to data developments, and sensitive to the balance of risks to the forecast.

Given the uncertain global situation, the MPC spent time during this meeting exploring different external scenarios.

For one, we considered a slowdown in the United States, with a weaker dollar and higher commodity prices, especially for gold. This implied some modest benefits for the South African economy, given better terms of trade and a stronger rand. Both inflation and the policy rate were therefore a little lower, relative to the baseline forecast.

We also explored scenarios built around changes in South Africa’s access to US markets. If South Africa were to lose AGOA benefits, we see some weakening of exports and slightly lower growth. If that were compounded with tariffs on South African exports, the effects would be larger. The most severe scenario we considered added a sentiment shock, with a weaker rand, higher domestic inflation and therefore a tighter policy stance. In this case, growth would be lower by 0.7 percentage points, with the exchange rate depreciation offsetting some of the tariff effects on exports.

In a difficult global environment, it is vital to sustain domestic reforms that boost growth, while preserving macroeconomic stability.

The MPC’s main contribution is to deliver low and stable inflation, with well-anchored inflation expectations. The committee remains vigilant, and ready to adjust policy as needed.

Additional measures that would improve economic conditions include reaching a prudent public debt level, further repairing and strengthening network industries, lowering administered price inflation, and keeping real wage growth in line with productivity gains.

The 2025Q1 GDP projection is 0.4% (q/q, seasonally adjusted), while 2025Q2 is 0.5%. Growth for the current calendar year has been marked down slightly, from 1.8% to 1.7%.