Reserve Bank cuts interest rates
The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) has voted to cut interest rates in South Africa by another 25 basis points.
This brings the repo rate down to 7.00% and the prime lending rate to 10.50%.
The decision was in line with economists’ and analysts’ views ahead of the meeting, where opinions were tilted towards a small cut.
While some had anticipated a hold on rates, given the imminent application of a 30% tariff on exports to the United States from Friday, 1 August, the MPC followed through with a cut.
Notably, the vote was unanimous.
Reserve Bank governor Lesetja Kganyago said that the global economic conditions remain uncertain amid the United States’ tariff push, while local conditions in South Africa remain under pressure.
He said the bank had warned that economic data in South Africa was weak, and this reflected in the GDP data that was published by Stats SA, including a downward revision to 2024’s growth.
However, more recent data has pointed to more positive growth, suggesting that the economy picked up in the second quarter of the year.
Nevertheless, the economy’s underlying growth trend remains low, mainly due to persistent supply-side problems, for instance in logistics.
Higher levels of uncertainty also affect output, with business and consumer confidence deteriorating in the first half of the year.
Inflation has remained low, but expectations have moderated, with the expectation that headline inflation will rise over the next few months, averaging 3.3% for the year.
It’s against this backdrop that the committee voted to cut rates by 25 points.
New inflation target
As with previous meetings, the MPC considered a new inflation scenario with a 3% target in its modelling.
Kganyago reiterated the SARB’s position that the existing 3%-6% target is too high and too wide, and should be reformed.
“With actual inflation close to 3%, we wanted to highlight the opportunity to achieve permanently lower inflation at minimal cost,” he said.
Using a 3% target model, the bank saw a near-term rise in headline inflation. However, core inflation remained the same.
“With a 3% objective, core inflation stays roughly where it is currently, which is close to 3%. Expectations settle around a ‘new normal’ of 3% during 2027, as stakeholders observe lower inflation and learn about the new target,” he said.
The governor noted that, in the model, inflation also benefits from a somewhat stronger rand.
In the alternative forecast with the 4.5% objective, by contrast, there is no learning, and the exchange rate is more depreciated, so inflation reverts to 4.5% instead.
Given this data, the governor said that the MPC prefers now for inflation to settle at 3%, and will aim for the bottom of the 3%-6% target range.
“We will use forecasts with a 3% inflation anchor at future meetings,” he said.
The SARB has been consulting with the National Treasury—which sets the target—to reform the policy.
“The South African Reserve Bank will continue working with the National Treasury to complete target reform and achieve permanently low inflation,” Kganyago said.
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