Sarb sees inflation easing after December peak, keeps rates on hold

South Africa’s inflation rate is expected to ease in the months ahead after peaking in December, despite ongoing risks from food and administered prices, South African Reserve Bank (Sarb) Governor Lesetja Kganyago said on Thursday.

Speaking after the Monetary Policy Committee (MPC) meeting, Kganyago said inflation reached 3.6% in December 2025, driven largely by temporary factors, but is now expected to slow.

Overall inflation for 2025 averaged 3.2%, close to the Reserve Bank’s 3% target under its newly adopted inflation framework.

“We expect this was the peak, and that inflation will slow from here,” Kganyago said, adding that near-term inflation forecasts have improved due to a stronger rand and lower assumed oil prices.

Kganyago said the inflation outlook remains balanced, although the bank is closely monitoring several upside risks. These include food price pressures, particularly rising meat prices linked to a serious outbreak of foot-and-mouth disease, as well as the risk of higher electricity tariffs.

Kganyago warned that the National Energy Regulator of South Africa’s (Nersa) price correction could increase from R54 billion to as much as R76bn, posing a potential threat to administered price inflation.

Despite these risks, inflation expectations have declined sharply. The latest survey shows longer-term inflation expectations at record lows, a development the Sarb views as critical to anchoring inflation at the 3% target.

Lower inflation expectations are expected to play a key role in sustaining price stability.

Kganyago noted that goods price inflation has already slowed significantly, supported by a stronger rand, with overall goods inflation at 3% and core goods inflation at just 1.2%.

Services inflation, however, remains elevated at above 4%, and the Bank would like to see this trend move closer to the 3% target.

The MPC decided to keep the repo rate unchanged at 6.75%, with the decision reflecting diverging views among policymakers. Two members favoured a 25-basis-point rate cut, while four supported holding rates steady.

According to the Sarb’s Quarterly Projection Model, gradual interest rate cuts are still expected as inflation continues to subside. The model currently assesses monetary policy as moderately restrictive, with interest rates projected to reach neutral levels during 2027.

However, Kganyago emphasised that policy decisions will continue to be taken on a meeting-by-meeting basis.

The SARB also presented alternative inflation scenarios to illustrate risks.

In a favourable scenario, driven by a stronger rand and lower oil prices, inflation could temporarily fall to as low as 2.3%, allowing for earlier and faster rate cuts.

In contrast, an adverse scenario involving a weaker rand and higher oil prices could see inflation peak at around 4%, slowing the return to the 3% target and delaying rate cuts by about a year.

Even under these adverse conditions, Kganyago said inflation would remain within the Bank’s tolerance band of 3% plus or minus one percentage point, underscoring the resilience of the current monetary policy stance.

Kganyago concluded that delivering sustained low inflation remains central to supporting economic stability.

Mamello Matikinca-Ngwenya, FNB chief economist, said the MPC’s decision to leave interest rates unchanged highlighted their effort to ensure that inflation is anchored at 3% over the medium term.

"Even as inflation could be softer this year and the recent slowing in surveyed inflation expectations to below 4% is supportive to the outlook, the MPC has chosen to be prudent," she said.

"This is because there are considerable price rigidities in the economy and further narrowing of the gap between expectations and the target will require monetary policy to remain restrictive. This will soften the acceleration in activity and contain core inflation."

However, James Booth, head of revenue of cross border payments provider Verto, said the MPC’s decision may limit immediate market reaction, but it does little to reduce the rand’s sensitivity to global developments such as US interest rates, commodity prices and geopolitical risk.

“For South African importers and exporters, this means currency volatility remains a key risk, regardless of where the repo rate sits. Sudden moves in the rand can materially affect pricing, profitability and cash-flow planning, particularly for SMEs operating on thin margins," Booth said.

“In this environment, businesses need certainty where they can control it. Actively managing FX exposure, improving settlement speed and reducing cross-border payment friction can help insulate companies from rand volatility, even during periods of policy inertia.”

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