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SARB expects lower SA inflation, while US tariff uncertainty persists

The South African Reserve Bank has cut the repo rate by 25 bps to 7.25%, citing slowing economic growth, says STANLIB Chief Economist Kevin Lings. The bank revised down its estimates of growth and inflation for this year and may announce a new lower inflation target of 2-4%, in line with emerging markets, in October. Another 25 bps rate cut could occur later this year, given current trends.

After two US court rulings that some of President Trump’s tariff hikes may be illegal, uncertainty about global trade conditions persists, with a risk of further disruptions.

The focus areas during the week included

• US equity markets had a strong start after a weekend announcement from President Trump that he would delay the introduction of a new 50% tariff on imports from the European Union (which was announced two days prior) until 9 July, and that negotiations between the trading partners would be “fast-tracked”. Unfortunately, the positive sentiment faded towards the end of the week, given the renewed increase in trade policy uncertainty. This includes rulings by two US federal courts that Trump does not have the authority to impose certain tariffs that were put in place in early April (see discussion below), comments from Treasury Secretary Scott Bessent about US/China trade talks being “a bit stalled”, as well as unsubstantiated social media comments by Trump suggesting that China had “violated” its preliminary agreement with the US. The S&P 500 ended the week up 1.9%, after declining by 2.6% the prior week, but has had an unconvincing first five months of the year, gaining a mere 0.5% year-to-date.

• Japan’s stock markets rebounded, with the Nikkei 225 Index gaining 2.2%, helped by expectations of a trade agreement between the US and Japan. Prime Minister Shigeru Ishiba and Trump reportedly held a constructive telephone call on Thursday ahead of the fourth round of talks in Washington. This, together with Trump’s backing for Nippon Steel’s bid for US Steel, fuelled speculation that both sides will announce a trade deal before the G7 meets in mid-June, when both leaders plan to meet. At this stage it is unclear how the recent US court rulings on Trump’s authority to impose reciprocal tariffs will impact further trade negotiations.

• The US dollar has lost a substantial 8.8% of its value against the euro in the year to date, mainly because of US trade-policy uncertainty. On a trade weighted basis, the dollar is down 6% – confirming that the recent decline in the dollar/euro exchange rate was due to dollar weakness rather than euro strength. Unsurprisingly, the recent dollar weakness has led to a strengthening of the rand/dollar exchange rate, with the rand gaining 4.2% against the dollar year-to-date. The rand’s outperformance is more modest against a trade-weighted basket of currencies, gaining only 0.1% year-to-date.

• After threatening to implement a 50% tariff on goods imported from the EU on 1 June, Trump announced in the prior weekend that the US will extend the EU tariff deadline to 9 July to allow more time for negotiations. In announcing the decision, he gave constructive talks with EU Commission President Ursula von der Leyen as the reason for extending the tariff deadline.

• The US Court of International Trade and a US District Court ruled that Trump does not have the authority to impose most of the global tariffs implemented since the start of his second term. Some of these tariffs are based on the International Emergency Economic Powers Act which the president is using to declare national emergencies caused by trade deficits and fentanyl. The Court of International Trade ruled that Trump’s tariffs do not directly deal with the declared emergencies and are instead being used as leverage to achieve a range of goals. The Trump administration appealed both decisions and requested a temporary pause, or “stay,” on their enforcement. The US Court of Appeals for the Federal Circuit has granted a stay on the trade court ruling, pending a hearing (and not pending an appeal) scheduled for 9 June. The District Court ruling is scheduled to go into effect on 12 June, allowing time for appeals. Tariffs on steel, aluminum and vehicles are not affected by either court action, as they were implemented under separate trade acts. Depending on the outcome of the appeal, tariffs could remain in effect, or the Trump administration could appeal to the Supreme Court, or reimpose tariffs under other statutes. These developments and the potential next steps highlight the policy uncertainty that continues to plague the US economy.

• US PCE inflation slowed to 2.1% y/y in April from 2.3% in March, below market expectations for a moderation to 2.2%. The better-than-expected outcome was helped by a 0.4% y/y decline in goods prices, which helped to offset services inflation of 3.3%. Within the services component, shelter inflation slowed to 4.2%, which remains above the long-term average of around 3.5%. Core PCE inflation dropped to 2.5% in April from 2.7% in March, in line with expectations. While PCE inflation is close to the Fed’s 2% target, the Fed is expected to keep rates on hold for a few more months as it gathers additional data to assess the impact of tariffs on inflation. We expect tariffs to put some upward pressure on inflation over the coming months.

• US initial jobless claims rose to 240 000 in the past week, above estimates of 226 000. This is the third consecutive week that jobless claims have risen, potentially reflecting some modest softening in the US labour market, which is not surprising, considering the uncertain policy backdrop to the economy. In addition, continued claims, which measures the number of people receiving unemployment benefits, ticked up to 1.92 million from 1.89 million the prior week. Overall, despite the rise in jobless claims, the US labour market remains generally healthy. The unemployment rate is still low at 4.2% and there are 7.2 million job openings, almost equal to the number of people unemployed. Wage gains should remain above inflation, providing positive real wages to support consumer spending.

• According to the minutes of the Fed’s 6-7 May Federal Open Market Committee meeting, which were released on Wednesday, policymakers “continued to view the risks around the inflation forecast as skewed to the upside”, largely due to “uncertainty surrounding trade policy and other economic policies”.

• The US Conference Board reported that in May 2025 its Consumer Confidence Index rose by a substantial 12.3 index points to 98. This follows five consecutive months of declines. According to Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board, “the rebound was already visible before the 12 May US/China trade deal but gained momentum afterwards. The monthly improvement was largely driven by consumer expectations as all three components of the Expectations Index…rose from their April lows.”

• The University of Michigan reported that the final reading of its May Index of Consumer Sentiment was unchanged from April, ending four consecutive months of steep declines. Similar to the Conference Board’s survey, confidence turned positive in the second half of May after the temporary pause in tariffs between the US and China was announced. This is an indication that trade policy uncertainty continues to be a driving factor in consumers’ outlook on the economy. Inflation expectations in both surveys remained elevated.

• SA’s National Treasury released its April 2025 statement of revenue, expenditure and borrowing. This is the first statement for the financial year. It showed that South African gross tax revenues for April 2025 were R121.3 billion, accounting for 6.1% of the budgeted R1.99 trillion gross tax revenues for 2025/26. On an annual basis, gross tax revenue collection rose by a significant 11.7% y/y in April. While it is still too early to draw any deductions, this is well above the 7% annual growth required to achieve the budgeted tax revenue for 2025/26. Key to April’s strong growth in tax collection was personal income tax (PIT), which grew by 10% y/y, boosted by the Minister of Finance’s decision not to adjust the income tax brackets to offset the negative impact of inflation.

• In April the growth in SA’s broad money supply (M3) accelerated to 6.1% y/y from 5.7% y/y in March. Despite the improvement, growth in money supply has been on a downward trend since peaking at 11.2% y/y in June 2023.

• SA’s private sector credit extension fell by R11.5 billion (-0.2% m/m) in April, after increasing by a robust R86.9 billion (+1.8% m/m) in March. Over the past year, private sector credit has increased by 4.6%, from 3.5% in March. The monthly breakdown of credit extension shows that corporate credit drove most of the decrease, falling by R13.7 billion (-0.5% m/m) in the month. In contrast, consumer credit increased by R2.3 billion (+0.1% m/m). Despite April’s increase in consumer credit, the growth in household debt has been largely stagnant, growing below its long-term average for the last 21 months.

• The South African Reserve Bank decided to cut the repo rate by 25 bps to 7.25% at its Monetary Policy Committee (MPC) meeting on Thursday. The decision was in line with market expectations, but not unanimous. Five MPC members argued for a 25 bps cut and one member suggested interest rates should be cut by 50 bps. In making the decision, the MPC highlighted the improved outlook to the inflation rate, which is expected to remain below 4.5% to the end of the forecast horizon in 2027. Interestingly, the Governor of the Reserve Bank discussed lowering the inflation target, stating that “National Treasury and the South African Reserve Bank have engaged extensively on this issue, and technical work is at an advanced stage”. According to their scenario analysis, the Quarterly Projection Model shows a lower path for interest rates, even with a 3% inflation target. Lastly, the MPC highlighted that domestic economic growth is likely to be disappointing in the first quarter of the year, given the weakness in high frequency indicators like mining and manufacturing production. The bank has lowered its GDP growth forecast for 2025 to only 1.2%.

• SA’s trade balance recorded a surplus of R14 billion in April 2025, down from a surplus of R23 billion in March. The reduced surplus was due to both a larger-than-expected increase in imports (+2.9% m/m) and a decline in exports (-2.9% m/m). In the year to date, SA’s trade surplus (R39.7 billion) is almost the same as last year’s (R40.6 billion), despite concerns about the impact of Trump’s tariff policies.

• Headline inflation in Spain and Italy slowed to 1.9% in May 2025, just below the European Central Bank (ECB)’s 2% target. Inflation in France increased by only 0.6% y/y, which is down from 0.9% in April. In Germany, the annual rate of inflation was 2.1%, down from the 2.2% in April but slightly above the consensus estimate (Bloomberg) of 2%. Given the ongoing slowdown in inflation in the Eurozone, the ECB could cut its key deposit rate by another quarter of a percentage point at its 5 June policy meeting.

• The ECB’s Consumer Expectations Survey for April showed that households in the Eurozone expected inflation to rise to 3.1% over the next year. This is up from 2.9% in the March survey. This upward trend in household inflation expectations contrasts with the ECB’s own forecast for inflation to decline further this year.

• The number of unemployed people in Germany rose by 34 000 in May 2025 to 2.96 million. This was above market expectations for an increase of 12 000. The total number of people unemployed is just below the psychologically sensitive three million level. Job openings in Germany declined by 67 000 from a year ago to 634,000, indicating weakening demand for labour.

• The core consumer price index for Tokyo in Japan rose to 3.6% y/y in May from 3.4% in April. This is the highest inflation rate for Tokyo in more than two years. Markets expected an increase of 3.5%.