South African Reserve Bank governor Lesetja Kganyago said monetary policy should remain restrictive despite progress made by the central bank’s progress in bringing down inflation to 3.6% and a 25 basis point (bps) cut to 6.75%.
“We are in a very uncertain environment, and it’s important that we move with caution ... Any future decisions will be based on the outlook, the incoming data, and our assessment of what that means, and that is what will form the basis of future decisions,” he said.
“If you look at the quarterly projection model, it basically says to you that you will get to something like [a] 5.75% [repo rate] at the outer years of the forecast horizon, and it doesn’t say you must do it now.”
The monetary policy committee (MPC) decided unanimously on a 25 bps cut to the repo rate this week. It comes as the CPI print for October ticked upward to 3.6%, but stayed well within the target band, remaining close to the new 3% inflation target.
The MPC’s repo rate announcement was the first since a downward adjustment to the official inflation target was announced by finance minister Enoch Godongwana in last week’s medium-term budget policy statement (MTBPS). Kganyago said 2025 was “a very uncertain year” but that the lower inflation target would help navigate shocks better going forward.
There will likely be further interest rate relief next year, but it cannot be taken for granted that this will be at consecutive meetings.”
— Elna MoolmaN, Standard Bank group head of South Africa macroeconomic research
“The tolerance band, of 1 percentage point either side of 3%, does not mean we will be indifferent to inflation anywhere between 2% and 4%. We want to be at 3%. However, no central bank has the tools to deliver inflation at an exact point all the time. As flexible inflation targeters, we also recognise that trying to offset all price shocks would create undesirable volatility in output.”
Kganyago said Godongwana’s MTBPS, along with South Africa’s removal from the Financial Action Task Force (FATF) greylist, and debt-to-GDP peaking at 77%, bodes well for the outlook going forward, and more progress would mean that monetary policy would no longer need to compensate for weaknesses in fiscal policy. However, while growth is better, it is not yet healthy.
“Inflation has accelerated somewhat over the past few months, reaching 3.6% for October,” he said. “This is higher than the 3% average for the first half of the year. The uptick is mainly due to noncore items: meat, vegetables and fuel.
“We continue to see this pressure as temporary, with inflation heading lower again from the beginning of next year. Indeed, recent outcomes have undershot our forecasts slightly.”
Kganyago said that because of these downside surprises, a stronger rand and a lower oil price assumption, the MPC had made “small downward revisions” to its inflation outlook for both 2025 and 2026, but remains on track to deliver 3% inflation over the medium term.
Prof Raymond Parsons of the North-West University Business School said the MPC made the “right” decision as a number of recent favourable financial developments have created the space to further ease borrowing costs for business and consumers.
“Monetary policy now needs to be supportive of the incipient economic upturn, as even with the latest 25 bps cut, real interest rates in South Africa remain relatively high by global standards. Job-rich growth is now the high priority.”
Parsons said the steadier growth outlook outlined by the MPC statement is being driven mainly by higher consumer spending, with fixed capital formation still lagging, and the cost of capital also needs to be reduced.
“In the coming year, a sufficient number of firms must feel that economic and political factors justify their fresh plans for expansion. Downside risks to export performance and growth from external tariff shocks also loom, pending a new trade agreement with the US.”
Elna Moolman, Standard Bank group head of South Africa macroeconomic research, said the bank’s models show that the maximum impact on consumer spending of the interest rate cuts in the current cycle will be felt next year, as the MPC cuts rates “gradually”.
“This will then counteract the reduced tailwind from low inflation. Consumer spending will also likely be boosted by a wealth effect from stock market gains. There will likely be further interest rate relief next year, but it cannot be taken for granted that this will be at consecutive meetings.”
Bradd Bendall, BetterBond’s national head of sales, said homeowners can breathe a sigh of relief knowing that they will have a bit extra in their pockets for the festive season.
“Another cut in the prime lending rate will bring welcome reprieve to homeowners, who will now have to pay less on their monthly bond repayments,” he said. “[This] means the repo rate has dropped a cumulative 150 bps since November 2024.”
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