South Africa faces a tough call this month

South African inflation expectations fell to an almost four-year low, providing policymakers with another reason to press ahead with their easing cycle.

However, global uncertainty continues to add pressure to the country’s risk outlook, potentionally warranting a more cautious approach from the South African Reserve Bank (SARB).

Average inflation expectations two years ahead — which the central bank’s monetary policy committee uses to inform its decision-making — slipped to 4.5% in the second quarter from 4.7% previously, according to a survey released on Wednesday by the Stellenbosch-based Bureau for Economic Research.

The MPC prefers to anchor inflation expectations at the 4.5% midpoint of its target band, and is in talks with the National Treasury to adjust the goal to 3%.

The data combined with low inflation bolsters the case for the panel to again cut the key interest rate by 25 basis points to 7% when it delivers its next decision.

Forward-rate agreements, used to speculate on borrowing costs, are pricing in 18 basis points of cuts at the July 31 meeting, or a 72% chance of a 25-basis-point reduction.

The contracts are pricing in a further 14 basis points of cuts in the remainder of the year, implying a 56% chance of a second 25-point reduction.

The SARB’s previous rate move was to cut by 25 basis points, which was decided by a five-to-one vote. The dissenting vote called for a higher cut of 50 basis points, showing potential appetite for easing.

Governor Lesetja Kganyago said Tuesday that South Africa’s inflation rate that’s been hovering near or below the floor of the MPC’s 3%-to-6% target range for eight consecutive months is creating “opportunistic disinflation” that will help policymakers to anchor price expectations at a lower level.

Kganyago is comfortable with the trajectory of South African inflation.

However, he said the outlook remains clouded by uncertainty stemming from geopolitical tensions, including US President Donald Trump’s trade war.

These risks warrant the central bank’s current policy stance, which he characterised as still restrictive while being fairly close to a neutral setting that neither heats nor cools the economy.

July brings uncertainty

While inflation expectations are still tracking lower, not all economists and analysts are anticipating an immediate easing of interest rates as a result.

Kganyago’s messaging around uncertainty in the market is pertinent given the importance of July for indicating how South Africa’s economic prospects will play out for the rest of the year.

A key deadline that many will be focusing on is 9 July, when the so-called Trump Tariff pause will come to an end, with South Africa facing a potential 30% tariff on its exports.

Trump imposed a 30% tax on US imports from South Africa in early April as part of his global “reciprocal” tariffs, before pausing their application for 90 days to allow for negotiations.

According to the Department of Trade and Industry, the country is appealing to Washington to extend the pause beyond 9 July, having submitted another trade deal to try and avoid the worst of it.

South Africa is hoping to exempt some of its key exports from the tariffs, including the automotive industy, which has already been hit by a 25% tariff in the States.

As part of the deal, South Africa has offered to buy liquefied natural gas from the United States in exchange.

The DTIC said it is hoping for the application of a 10% tariff at worst, keeping the status quo in effect.

The outcome of the Trump tariffs is only one pressure point that the Reserve Bank will have to consider when determining its next interest rate move.

Another is global oil prices, which spiked in June, leading to a rise in petrol and diesel prices from Wednesday (2 July). This will contribute to inflation pressure going forward.

The SARB will also be keeping an eye on the rate decisions by the US Fed, which faces its own pressures, both economic and political

While modelling might show more interest rate cuts this year, economists have said the path forward is not as clear-cut as low inflation readings.

Reporting with Bloomberg