Interest rate hike warning for South Africa
South Africa’s inflation print has ticked upwards, and experts have warned that the South African Reserve Bank (SARB) may have less room to cut interest rates in the near future.
Notably, if the government doesn’t support a move to a new 3% inflation target and adjust its spending to match, the Reserve Bank may be forced to hike rates to compensate for this.
The latest inflation figures from Stats SA showed that annual consumer price inflation jumped 0.5 percentage points to 3.5% in July 2025.
The main contributors to the annual increase were food, non-alcoholic beverages (Food NAB), housing, and utilities.
Food NAB has been ticking higher throughout the year, with meat and vegetables showing double-digit monthly inflation.
Housing and utilities also grew by 4.3% year-on-year, as various municipal rates and taxes were lifted.
Tariffs for water supply increased by 12.1% in 2025, a massive jump from 2024’s rise of 7.5%. Electricity also climbed by 10.6% in 2025, a steep increase, even lower than the 11.5% recorded in 2024.
This year, refuse collection and sewage removal tariffs were added to the inflation basket. Refuse collection rose by 6.6% and sewage removal by 6.5%.
The figures highlighted that these input costs are part of the overall inflation dynamics. Without the rise in utility costs, headline inflation would have only stood at 3.1%.
The latest figure may be at the lower end of the target range of 3% to 6%, but it is starting to climb after months of being around the 3% mark.
Chief Investment Office of PSG Wealth Adrian Pask noted that while the rate remains within the target range, the upward trend could reduce the likelihood of additional interest rate easing.
The SARB has cut rates by 125 basis points since September 2024, bringing the repo rate down to a neutral level of 7.0%, following a massive decline in inflation.
The Reserve Bank’s modelling points to another 25 basis point cut in the cycle in 2025, with another 125bps possible in 2026 and 2027 if South Africa can maintain an inflation target of 3%.
However, the relatively large upward swing in the latest data puts this in doubt.
Rate hikes coming if government leaves the SARB hanging
Economists have also questioned how the SARB could achieve its new 3% inflation target without government support.
At the latest Monetary Policy Committee (MPC) meeting, Governor Lesetja Kganyago announced that the SARB would base its interest rate decisions on achieving 3% inflation.
The six-person MPC previously based its interest rate decisions on achieving 4.5%, the midpoint of the target range.
The SARB has indicated that it can cut interest rates by 125 basis points in 2026 and 2027 if it can achieve the 3% target.
However, the move has been met with some resistance from the Finance Minister, who is responsible for setting the target.
Although Kganyago has been confident that the relevant parties will be able to reach an agreement, FNB’s economists have stressed that the government has to play ball.
“Fundamentally, a failure by the government to fully subscribe to a 3% inflation target will weaken the efficacy with which the SARB reduces the inflation target,” said FNB.
“As long as many of the costs consumers face daily remain elevated, the MPC’s reliance on responsive inflation expectations supporting the journey to lower inflation will be at risk.”
Monetary policy may then have to restrict activity more than desired to compensate for pricing behaviour that does not quickly follow the new 3.0% target.
Regarding future inflation outcomes, FNB expects headline inflation to remain flat in August.
Monthly pressure on food could slow, while average fuel prices could detract from monthly headline pressures.
This will be supported by muted momentum in underlying inflation, meaning that South Africa sees contained monthly pressure on the headline figure.
However, fading positive base effects will increase annual inflation over the coming months.
“Headline inflation should remain below the midpoint of the target range. Relatively soft inflation will be supported by weak oil prices, a stronger rand, and a slow recovery in economic activity.”
“The rise in utility costs, which have tended to surpass headline inflation in history, will continue to place upward pressure on the inflation expectations of households and businesses.”
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