Reserve Bank cuts interest rates by 25 points

The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) has voted to cut the country’s interest rates by 25 basis points.

This brings the repo rate down to 7.25% and the prime lending rate to 10.75%.

As anticipated by economist polls and analysis ahead of the meeting, the decision was not unanimous, but surprisingly, none of the members voted to hold

Five members voted for a 25 basis point cut, and one voted for an even bigger 50 basis point cut.

Reserve Bank governor Lesetja Kganyago said that since the previous meeting, global economic conditions have been volatile.

“Higher tariffs on imports into the United States have been announced, and then partly reversed. US assets have sold off, while alternative safe havens, such as gold and the euro, have performed well,” he said.

“The combination of higher trade barriers, plus elevated uncertainty, is likely to weaken the world economy. We have therefore lowered our global growth projections.”

He noted the US Fed has opted to hold its rates, but other central banks have been cutting rates.

For South Africa, data has been lagging. While there is no official GDP data for the first quarter yet, he said indicators for sectors like mining and manufacturing have been disappointing.

Unemployment has also risen. As such, GDP projections have been cut to only 1.2% in 2025, rising to 1.8% in 2026.

Inflation has been tracking below the Reserve Bank’s target range, driven predominantly by lower fuel costs. Average inflation expectations for the year have thus been pulled lower

This also reflects the removal of a VAT hike from the picture, which was included as a risk factor in the bank’s last calculations.

Given this backdrop, the bank opted to cut rates, bringing some relief to consumers.

Inflation target changes on the way

Kganyago said that the MPC also considered scenarios this week using a 3% inflation target.

Speculation has been rife among analysts, economists and commentators that the central bank will soon be lower its inflation targeting, which will have a significant impact on the pace and scale of rate decisions.

The governor said that internal and external analyses have shown that South Africa’s inflation target is too high and too wide.

“The National Treasury and the South African Reserve Bank have engaged extensively on this issue, and technical work is at an advanced stage,” he said.

“Now that inflation has slowed, we have a chance to lock in lower inflation at low cost. This scenario illustrates that opportunity.”

For a 3% objective, Kganyago said the bank’s Quarterly Projection Model shows a lower path for interest rates.

Both the baseline and the 3% scenario have a cut in this quarter, he noted.

“However, rates move steadily lower in the scenario as inflation comes down. The policy rate falls to just under 6%, rather than staying above 7%, as in the baseline.”

“Inflation expectations stabilise at 3% during 2026, helped by the experience of lower inflation. Growth is somewhat slower at first, because real rates are initially higher, but the economy does better later in the forecast, as rates ease further.”

Based on the results of this scenario mapping, the governor said that the MPC is of the view that the 3% scenario is more attractive than the 4.5% baseline.

“We would like to see inflation expectations move lower, towards the bottom end of our target range. We will also consider scenarios with a 3% objective at future meetings,” he said.