South Africa’s inflation outlook has improved further due to the recent drop in oil prices. We see both headline and core inflation running bellow target for the foreseeable future. Next weeks budget announcement will likely be inflationary on net, however, its impact is unlikely it be large enough as to bring inflation back to target by year-end.
Figure 1: South African Inflation – %YoY
We update our South Africa inflation outlook to incorporate the recent data as well as the move lower in oil prices. The outlook remains very benign: the move lower in oil prices – if persistent – might drive headline inflation below the 3% lower bound in March if there are no new shocks until then. We then see inflation gradually accelerating to 3.6% YoY by 4Q25 and 3.8% by 4Q26. Both headline and core are expected to stay under 4% throughout the entire forecast horizon. Our forecast is much more benign than the SARB’s and consensus’ as both see convergence to target by 4Q25.
Figure 2: South Africa Headline Inflation Forecast Paths – %YoY
This scenario does not incorporate the impact of the upcoming budget announcement, which will likely be inflationary on net. If the government delivers a VAT hike, this will mechanically push inflation up: we estimate a ~+42bps impact on headline for a one-point increase in VAT based on the 2018 episode. If the budget does not include measures to curb the deficit, the currency is likely to weaken and bump up the inflation outlook. The budget announcement would only be disinflationary if the government manages to deliver a spending-based adjustment – something that apparently is not under discussion.
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 baseline inflation – Statement of the Monetary Policy Committee March 2025.
Statement of the Monetary Policy Committee March 2025
While there is uncertainty regarding the fiscal announcement, our analysis suggests that it is unlikely to materially deteriorate the inflation outlook. Our lower-than-consensus baseline scenario suggests both a VAT increase and/or some currency weakness would still lead inflation to remain below the 4.5% midpoint by year-end. If the VAT is raised by +0.75% effective in April and USDZAR remains steady at 18.4, we would expect inflation to average 3.9% YoY in 4Q25. If the original +2% increase proposed by FinMin Godongwana is implemented, inflation would reach 4.4% by 4Q25. If no measures to curb the deficit are taken, the currency would need to depreciate way past its all-time high to generate enough inflationary pressures so that inflation converges to target by year-end.
Our benign inflation outlook remains consistent with additional SARB cuts. The budget next week should provide additional clarity on the CPI path ahead.
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