SA Fixed Income

• Global Review April 2025>South African Fixed Income

In March, several central banks in advanced economies held monetary policy meetings. Despite differing stances on monetary policy, they all highlighted trade tariffs as an uncertainty that could impact their economic forecasts. The US Federal Reserve, Bank of England (BOE) and Bank of Japan (BOJ) decided to keep interest rates unchanged, in line with market expectations. In contrast, the European Central Bank (ECB) cut all three of its key interest rates by 25 basis points. The ECB’s Governing Council noted that the “disinflation process is well on track” and expects inflation to stabilise around the 2.0% target over the medium term.

In South Africa, the Minister of Finance finally tabled the 2025 Budget, with the key highlight being a more moderate 0.5% increase in VAT, compared to the previously proposed 2.0% hike in the untabled budget. By opting for a smaller VAT increase, the National Treasury is signalling its commitment to fiscal consolidation. However, the fate of this proposed budget remains uncertain, as several parties within the Government of National Unity (GNU) express differing views on the content and proposals. In other domestic news, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) left the repo rate unchanged at 7.50% during its meeting in March, in line with expectations.

Local CPI inflation remained steady in February at 3.2% year-on-year (0.9% month-on-month), still well below the target midpoint of 4.5% YoY. Despite this, it was a month of relatively high price pressures according to the surveyed data. Core inflation, which excludes food, non-alcoholic beverages, fuel and energy prices, dropped slightly to 3.4% YoY in February from 3.5% in January, reflecting the moderate nature of underlying inflation in South Africa.

The Rand has experienced some weakness against the Euro since the start of this year, at R19.58/EUR, reaching R19.90/EUR by the middle of March. The Rand has been particularly volatile against the US dollar, at R19.23/USD in mid-January, but at that stage market expectations for US interest rate cuts had been largely factored out for this year. More recently, however, markets have factored them back in. The Rand eventually ended the quarter at R18.32/USD

The ALBI returned 0.19%, with support stemming from the front-end and the belly of the curve. The back end of the curve detracted from performance, however.

Inflation-linked bonds delivered muted performance for the period. Both the FTSE/JSE Inflation-Linked Index (CILI) and the Government Inflation-Linked Bond Index (IGOV) were broadly flat during March.

Looking ahead, we maintain a cautious stance amid heightened global market volatility. We continue to monitor global interest rate policies, inflation trends and their potential impact on local markets. We remain committed to a holistic investment approach, guided by the many factors influencing interest rate movements.

We anticipate further rate cuts locally as inflation is expected to remain muted in the short term. For now, most of the risk to bond market volatility lies with global market volatility.