SARB hints at future interest rate cuts as inflation target shifts to 3%

The South African Reserve Bank (Sarb)  has signalled potential future interest rate cuts as it embarks on a strategic adjustment to its inflation-targeting framework from the midpoint of 4.5% to 3%.  

This comes as the Sarb’s Monetary Policy Committee (MPC) on Thursday unanimously reduced its benchmark lending rate for the second time in a row by 25 basis points to 7%, 2025, the lowest level since November 2022. 

This means that the prime lending rate will also decline from 10.75% to 10.50% per annum. 

The cut was widely anticipated amid concerns over a new US tariff regime threatening the already fragile economy. 

FNB chief economist Mamello Matikinca-Ngwenya said the decision highlighted the MPC’s focus on stable domestic conditions.

Matikinca-Ngwenya said while they expected the MPC to reflect more restraint amid a contentious global trade environment that could intermittently weigh on sentiment, lift the cost of borrowing, and weaken the rand, the rates cut decision was not a surprise. 

“Despite adverse global conditions and rising local inflation, as positive base effects fade and food price pressures mount, headline inflation over the coming months should remain contained around the 4.5% midpoint of the target range,” she said. 

“The trajectory is supported by weak oil prices, along with a benign local environment. These factors should assist with containing inflation expectations and maintaining interest rates as we think this is the last cut in this cycle. Ambitions to lower the inflation target should keep monetary policy steady.”

Sarb Governor Lesetja Kganyago noted a stronger rand and more moderate inflation expectations.

Kganyago said the Sarb will start to aim at the bottom of the inflation target range which is at 3% as their inflation target going forward. 

“That said, food inflation has risen, mainly due to meat prices. Fuel prices are also falling more slowly now, compared to the recent past,” he said. 

“We therefore expect headline inflation to rise over the next few months, averaging 3.3% for the year, in line with our earlier forecasts. Prices then stabilise around the target objective over the rest of the forecast period. The risks to this outlook appear balanced.” 

Kganyago said that in the Sarb’s Quarterly Projection Model, for a 4.5% objective, rates bottom out around 7%. 

By contrast, the forecast for a 3% objective has roughly five more cuts, over the medium term, taking interest rates slightly below 6%.

“The logic of the model is that interest rates need to fall as inflation eases, to prevent the inflation-adjusted rate, or real interest rate, from rising too much,” Kganyago said.

“Real rates are nonetheless temporarily higher for a 3% objective, and there is a modest growth sacrifice, which helps anchor expectations at lower levels.” 

Frank Blackmore, lead economist at KPMG, said there were several benefits to lowering that inflation target from the current 4.5% to the 3% level. 

Blackmore said the core inflation remained close to 3% instead of reverting back up towards 4.5%, and expectations will take a while to come down to the 3% level as well. 

“There will be further rate cuts on the 3% target scenario. The governor mentioned up to five more possible cuts, this would lead us to a level of around 5.75% on repo or 9.25% prime,” Blackmore said. 

“This would lower the borrowing costs and support the strength of the rand. Reducing inflation to this level is an exciting prospect going forward.” 

Dr Elna Moolman, Standard Bank Group head of South Africa macroeconomic research, said inflation has been quite benign and the inflation forecasts remained quite benign.

Moolman said this created scope for the Sarb to provide a little bit of additional relief to the economy. 

“The Reserve Bank has indicated that its focus is now shifting on getting inflation closer to the lower end of its 3-6% target range. In recent years, the focus was on anchoring inflation around the midpoint of the target range,” Moolman said.

“Despite focusing on a lower point in this 3-6% target range, the Reserve Bank's own models imply that there is still scope for the Reserve Bank to provide further relief to the economy in due course.” 

Meanwhile, the Sarb has revised downwards the country’s 2025 growth forecast by 0.2 percentage points, from 1.2% to 1%, on the back of weak economic activity and the potential impact of higher US tariffs.

Kganyago warned that though the global economic outlook was largely unchanged, there were risks that permanently higher tariffs, or adverse geopolitical developments, could cause more disruption to the global economy than realised so far this year.

“However, we still expect modestly higher growth in the coming years, supported by ongoing structural reforms.” 

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