The South African Reserve Bank (Sarb) believes it is winning the war with inflation and is now explicitly aiming for the bottom end of its official 3% to 6% target range to extend the gains it has wrought on this economic battlefield.
With inflation at 3.0%, the Sarb’s Monetary Policy Committee (MPC) cut its key repo rate by 25 basis points on Thursday – a move that pointedly had the unanimous support of all six members, underscoring the central bank’s confidence on this front.
This was the second 25 basis point cut on the trot, and the latest move, effective from Friday, 1 August, takes the repo rate to 7.0% and the prime lending rate to 10.50%, bringing further relief to consumers and businesses in a tough and uncertain economic environment.
What this means for you
There is added relief for consumers and businesses, but many people will be asking how to manage their debt going forward. For example, homeowners might ask about fixing their bond rate. Toni Anderson, Head of Home Services at Standard Bank, said in a commentary that the answer depends on your financial outlook. “If you fix your rate now and the Sarb starts hiking again, you’ve shielded yourself from future increases ... This could be a smart move if inflation remains sticky or if the target range is lowered, as such developments could affect future interest rate decisions.”
However, there are risks, Anderson noted. “If rates continue to fall or stay low for longer, fixing your rate could mean you end up paying more than you would on a variable rate. That’s why we encourage customers to consider their financial goals, risk tolerance and how long they plan to stay in their home.” And if the lower inflation target translates into lower inflation in the long run, more cuts can be expected.
With inflation seemingly well contained, the Sarb now wants to keep it bottled up at 3%.
“Over the past few months, the prospect of a lower inflation target has bolstered the rand and lowered long-term borrowing costs. It is important to sustain this progress and to minimise uncertainty about the longer-term objectives of monetary policy,” the MPC statement said.
“Therefore, the MPC now prefers inflation to settle at 3%. In line with this, we have decided to aim for the bottom of our inflation target range ... We welcome the recent moderation in inflation expectations and would like to see expectations fall further.”
This is a big deal and comes against the backdrop of ongoing discussions with the Treasury about lowering the target from its 3% to 6% range. This remains the official policy, but in reality, the Sarb is moving ahead with its eye firmly on 3%.
“... de facto, South Africa now has a 3.0% preferred level of inflation, and monetary policy will now work towards its achievement. This is a significant macroeconomic positive,” said Razia Khan, chief Africa economist at Standard Chartered Bank.
The bottom line is that lower inflation – anchored by a lower target – gives the Sarb scope to cut rates further.
“... lower inflation allows for lower interest rates. In our 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 statement said.
The Sarb has long signalled its view that a 3% target is preferable, and it wants to see this set in policy stone. But the markets now know that it is laser-focused on 3%, a state of affairs that can help lower inflation expectations and hence inflation.
“While the rand has strengthened, food prices have come under pressure and fuel prices are declining more slowly. Inflation is expected to average 3.3% for the year before stabilising at the 3% target by 2027,” the statement said.
It must be said that South Africa’s low-growth economy is hardly fanning the flames of inflation, and demand pressures remain generally muted.
“With economic activity weak and with possible higher US tariffs on South Africa, growth (for 2025) is revised down from 1.2% to 1%,” the statement said.
But in the long run, lower inflation – along with lower interest rates – is seen as one of the crucial paths to higher rates of economic growth.
The conversation around inflation in South Africa has now changed dramatically. DM