Door open to double interest rate cuts in South Africa
The South African Reserve Bank’s (SARB’s) decision to lower the inflation target should result in lower interest rates in the future, even if the market isn’t as optimistic as the central bank.
While the SARB’s Forward Rate Agreement (FRA) signals around 50 basis points of cuts through to the end of 2026, the central bank believes a lower inflation target could double this to 100bps.
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.
This is at the lower end of the Reserve Bank’s target range of 3% to 6%. The six-person MPC has, until now, based its interest rate decisions on achieving the midpoint of 4.5%.
Inflation has remained subdued in South Africa for close to a year, having stayed around the 3% figure since October 2024. This allowed the Reserve Bank to cut interest rates by a cumulative 125 basis points to 7.00%.
Notably, the decision to lower the inflation target drew the ire of Finance Minister Enoch Godongwana, who is responsible for setting the inflation target. At the same time, the Reserve Bank aims to reach the target.
Kganyago seems unfazed by the government’s criticism of the move, believing that the parties will soon reach an agreement to officially lower the targets.
The MPC said that the decision to lower the target would result in interest rate cuts coming in the future, totalling another 100 basis points. This would bring the repo rate to 6.0%.
The SARB’s quarterly projection model sees a further 100 basis points cut to the end of 2026. This includes another 25 basis point cut in 2025, with only two meetings left this year.
The logic of the model is that interest rates need to fall as inflation eases, which is to prevent the inflation-adjusted/real rate from rising too much.
With a 3% objection, core inflation is expected to remain where it is currently, as it is around the level.
The SARB expects interest rates to settle around a ‘new normal’ of 3% during 2027, as stakeholders observe lower inflation and learn about the new target.
Inflation also benefits from a stronger rand. With a 4.5% objective, the exchange rate is more depreciated, resulting in inflation reverting to 4.5%.
Markets are not as optimistic
Although reducing inflation targets has proven to be effective in leading to lower interest rates in the future, the market is not yet 100% convinced.
However, Chief Economist Annabel Bishop said there has been little market reaction apart from the small 15 basis point drop in the domestic benchmark bond yield.
Market focus has chiefly been on international events instead, particularly US trade policy and its effects.
South Africa’s financial market Forward Rate Agreement (FRA) has not adjusted to mirror the SARB’s layered interest rate forecast, with the FRA only showing a 50 basis point drop in interest rates to end 2026.
Whether there are 50 or 100 basis point cuts by the end of 2025, lower interest rates are good news for the property market.
“With inflation expected to rise in 2H25, we anticipate a prolonged pause in rate changes as the SARB guides expectations toward this new anchor,” said Siphamandla Mkhwanazi, FNB Senior Economist.
“Lower borrowing costs, alongside improving real wages and stable inflation, should support housing demand, particularly in the low- to middle-income segments, reinforcing the current upward price cycle.”
The latest FNB House Price Index (HPI) averaged 3.7% and marked a big shift as house prices rose faster than inflation, resulting in real increases in the values of properties.
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