The South African Reserve Bank has room to consider an interest rate cut at this week’s monetary policy committee (MPC) meeting, but with a lowered inflation target, economists are concerned about a “complicated” outlook.
The central bank cut the repurchase rate at which it lends to commercial banks to 7% at its July meeting — the second consecutive 25 basis point cut this year — and signalled that there would be sufficient space for the committee to lengthen the cutting cycle.
The bank’s July forecast indicated at least one more 25 basis point cut this year and nearly two next year, before rates settle just below 6% in 2027. In May, it had predicted expected rates would settle around 7% over the medium term.
At the May, meeting the Reserve Bank, which has a 3% to 6% inflation target, said it had considered a scenario with a 3% inflation objective, saying for some years, internal and external analysis showed that “our inflation target is too high and too wide”. The bank said it had had extensive discussions with the treasury on this issue and technical work was at an advanced stage.
At the following meeting in July, the central bank said it now preferred inflation to settle at 3% and that in light of this it had decided to aim for the bottom of the 3% to 6% target band. It said it would use forecasts with a 3% inflation anchor at future meetings and would continue working with the treasury to complete target reform and achieve permanently low inflation.
That triggered a terse response from the treasury, which said the Reserve Bank’s statement had created an expectation that Finance Minister Enoch Godongwana would announce the move to a 3% inflation target in his medium-term budget policy statement later this year. The minister “has no plans to do this”, the treasury said.
“Any adjustments to our inflation-targeting framework will follow the established consultation process,” Godongwana said in comments carried in the statement.
“This means comprehensive consultation between the national treasury, the Reserve Bank, cabinet and relevant stakeholders — not unilateral announcements that pre-empt legitimate policy deliberation. Any changes to the target, if necessary, will follow this process.”
Economists have a mixed view around how the 3% target might affect South Africa’s growth prospects, especially as inflation pendulums and international trade tariffs begin to take effect.
According to Statistics South Africa last week, second quarter GDP growth came in stronger than expected at 0.8% from a marginal 0.1% in the previous quarter, reaching its highest level in two years, but economists warned that this was still not enough to bolster the creation of new jobs and lift household incomes.
Economists at Nedbank said they expected the Reserve Bank to hold the interest rate at 7% on Thursday, adding that the timing to reduce the inflation target appeared inopportune.
“We support the adoption of a lower target, but the timing of the move complicates our outlook for monetary policy. It comes as the inflation cycle turns upwards. We already have four months of rising headline inflation behind us and expect the upward drift to continue throughout next year,” Nedbank said in a note.
Consumer inflation accelerated to 3.5% year-on-year in July from 3.0% in June — the second consecutive year-on-year increase and the highest rate in 10 months. Stats SA is due to release August inflation data on Wednesday.
Nedbank expects inflation to peak at 4.5% towards the end of 2026, before slowly easing towards 3% by the end of 2027. The risks to the inflation outlook seem balanced, with the upside risks from food and electricity offset by downside risks from a stronger rand, lower global oil prices and patchy domestic demand.
“Our view of inflation’s path is not materially different from that of the Reserve Bank or most other analysts. Most forecasts reflect a relatively benign inflation outlook. For us, the bigger question is how will the Reserve Bank react as inflation moves further away from its 3% target,” it said.
“We suspect the Reserve Bank would need time to assess the nature of the current inflation cycle. The underlying drivers appear temporary, but it is still too early to rule out the possibility of secondary effects. Given that the changes in US trade policy only kicked in recently, the effects on the international and local economies will take time to filter through.”
FNB also predicted that the Reserve Bank would keep rates unchanged this week, adding however that a softening inflation outlook would be a trigger to lower interest rates.
“As the output gap narrows and inflation is entrenched at 3%, monetary policy should be neutral. Therefore, there would be further space to cut interest rates, towards 5.5%, in the period beyond 2027,” FNB said.
FNB said it believed the MPC would want to sufficiently convince itself that inflation expectations are becoming anchored at 3%, not 4.5%, before cutting rates again.
Investec is expecting one more 25 basis point interest rate cut this year. The bank said market expectations were vacillating ahead of this week’s MPC meeting.
Economists are uncertain about how the bank will adjust its policies based on the lower target it has signalled it wants to pursue
