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Frederick Mitchell, Chief Economist | Aluma Capital (Pty) Ltd
Frederick Mitchell
January 30, 2025

Interest Rate

25 Basis Point Cut Interest Rate Cut

The interest rate has been cut by 25 basis points, aligning with market expectations. The Reserve Bank remains cautiously optimistic, forecasting contained inflation and an economic growth projection of 2.0% in the medium term. Increased disposable income and stable electricity supply are positive signs, despite some supply challenges in mining and manufacturing.

The interest rate has been reduced by another 25 basis points, a move that some market analysts anticipated. The Reserve Bank remains cautious, highlighting its commitment to closely monitoring local and international developments, especially the potential trade war among major economies. Importantly, inflation is expected to remain contained for at least the first half of 2025, with core inflation projected to stay within the target range of 3% to 6%.

Rising confidence levels and a stable electricity supply offer promising signs for economic growth in late 2024 and into 2025, with a growth projection of 2.0% for 2027. Commissioner Lesetja Kganyago emphasised that there are still upside risks, particularly regarding currency depreciation due to increased international tariffs linked to possible trade wars. Additionally, administered prices are expected to rise significantly, well above current inflation levels, which could further influence inflation in the economy.

On the demand side, the economy is rebounding from a low base, supported by increased disposable income resulting from withdrawals from the two-pot pension system and recent interest rate reductions since September 2024. However, the supply side remains subdued, with mining and manufacturing production figures still falling short of expectations.

The Governor also stated that the Bank’s inflation forecast for 2025 is around 4.5%. Future interest rate decisions will be data-driven, taking into account current economic conditions and international developments that may impact the domestic economy later in 2025.

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More Coverage

Budget Speech 2025

A Balancing Act
Much has happened in the last twelve months as well as the last month since the postponement of the February 2025’s budget. The big talking point and “bone of contention” was the mooted 2% increase in VAT. This increase was met with fierce resistance and made “balancing the budget” quite difficult, as the government has to decide between increasing taxes of cutting expenditures, leaving the Government of National Unity (GNU) between a “rock and a hard place” as it currently stands. The increase in VAT or other taxes sprout from the various expenditure items the government announced or want to implement which among other things include the National Health Insurance (NHI), a transformation fund and continuation of the Covid-19 relief grant and the possible introduction of a Basic Income Grant (BIG).

A View on Company Profits

2024 Q4
Company profitability is vital for investors and the government. In South Africa, the Gross Operating Surplus (GOS) indicates positive growth, with profits surpassing inflation in late 2024. Notable gains in the Agricultural sector (68.8%) contrast with modest growth in Mining and Personal Services, reflecting an optimistic economic outlook post-election.

A Sticky Affair

The South African Budget Speech Postponement
The Laffer Curve is an economic theory that describes the relationship between tax rates and tax revenue. Proposed by economist Arthur Laffer, the curve suggests that there is an optimal tax rate that maximizes government revenue without discouraging productivity, investment, and economic growth. The central idea is that increasing tax rates beyond a certain threshold can lead to diminishing returns; higher taxes may disincentivize work, entrepreneurship, and investment, ultimately reducing the overall tax base.

GDP, Economic Growth and Inflation

2024 Q4
The South African economy showed resilience with a 0.6% growth in the fourth quarter of 2024, despite challenges. Key sectors like Agriculture and Finance thrived, and improved consumer demand signals optimism for 2025. With continued market confidence and government reforms, there is potential for significant economic advancement ahead.

Private Sector Credit Extension (PSCE)

January 2025
In January 2025, credit demand rose by 4.6%, exceeding expectations, although overall demand is still modest. Interest rate cuts are expected to enhance property and asset purchases as disposable incomes improve. As consumers increasingly rely on credit, overall demand for goods and fixed assets is poised to rise throughout 2025
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