By Lehlohonolo Lehana.
The South African Reserve Bank’s Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged at 7%, with the prime lending rate at 10.50%.
Economists were divided on whether the MPC should keep interest rates unchanged or extend its current easing cycle since deciding to anchor inflation at 3%.
While lower-than-expected inflation and easing expectations support the case for a rate cut, the central bank’s July decision to anchor inflation at the bottom of its 3%–to-6% target range — rather than the midpoint — has made the call more complex.
The Fed cut rates by a quarter point on Wednesday and signaled 50 basis points of further easing this year.
Governor Lesetja Kganyago said the SARB expects headline inflation to climb in the coming months, peaking at about 4%. Its latest forecast factors in higher electricity price inflation of nearly 8%, up from 6%, following Nersa’s recent pricing correction.
The central bank warned that the adjustment highlights the dysfunction in administered prices, which it said erodes purchasing power and constrains growth.
The solution to this crisis is not a higher level of inflation, but rather sector-specific reforms to improve efficiency, it said.
Inflation projections for food and services have also been revised upwards, partly offset by a stronger exchange rate assumption. The Sarb now expects headline inflation to average 3.4% in 2025 and 3.6% in 2026 before returning to 3% in 2027. Risks to the outlook are assessed as balanced.
Against this backdrop, the MPC kept the repo rate steady at 7%, Kganyago said. Four members voted to hold rates, while two favoured a 25-basis point cut.
Frank Blackmore, Lead Economist at KPMG said, MPC believe it is beneficial to maintain consistency at the lower end of the target range. In other words, to keep inflation closer to 3% rather than 4.5%.
To achieve this meaningfully, inflation expectations need to shift downwards from around 4.5% to 3%. Recent surveys indicate some progress, with expectations now hovering around 4.3%. However, there is still a significant way to go before they reach the 3% target.
As a result, the Bank has decided to clearly communicate this new target to help anchor expectations around the 3% level. At this stage, no further reductions in interest rates have been made.
The benefit of setting a 3% target is that it signals a long-term expectation of lower inflation, which would, in turn, support a longer period of lower interest rates. This would be the ultimate payoff of achieving the 3% inflation goal.
The Bank anticipates a period of adjustment as expectations gradually move from the previous 4.5% level down to 3%. Once this transition is firmly established, further reductions in interest rates may be considered.
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Video Courtesy of SARB.