Reserve Bank Governor Lesetja Kganyago said it wants the inflation rate to settle at 3%
The South African Reserve Bank decided to cut the repo rate, as economists expected, although the governor started his speech with a reference to the uncertain global economic conditions. The decision was unanimous to cut the repo rate by 25 basis points.
Lesetja Kganyago, governor of the South African Reserve Bank (Sarb), also confirmed that the Monetary Policy Committee (MPC) of the Sarb will now prefer the inflation rate to settle at 3% as it wants to move away from the current inflation target band of 3% to 6%.
The MPC decided to cut the repo rate despite the US Fed not cutting interest rates in the US on Wednesday. The committee usually follows the Fed in deciding to change the repo rate.
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Wait-and-see phase for central banks with tariff uncertainty
Pointing out that global economic conditions remain uncertain, Kganyago said after the US paused tariff increases in April, the next deadline expires on Friday, while many countries do not yet have new trade deals.
“World oil prices spiked in June, due to escalating conflict in the Middle East, but have since eased again. To date, global economic activity has been broadly resilient to these stresses. The world growth outlook is largely unchanged from our last meeting but there are risks that permanently higher tariffs, or adverse geopolitical developments, could cause more disruption to the global economy than we have seen so far this year.”
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He said for the major central banks, policy is generally in a wait-and-see phase.
“In the US there are signs of new inflationary pressures from tariffs while monetary policy remains ‘modestly restrictive’. In Europe, by contrast, inflation is lower and policy is more neutral. All the major central banks kept their policy rates unchanged at their most recent meetings.”
Weak GDP in first quarter but expected to pick up
Kganyago pointed out that the MPC warned in May that economic activity for the first quarter of 2025 was looking weak in South Africa. “Statistics South Africa since reported that growth was just 0.1%, in line with our expectations. However, there was also a downward revision to earlier gross domestic product (GDP) data.
“Along with an assumption of higher US tariffs on South Africa, this has caused us to mark down our 2025 growth forecast. However, the recent data flow has been positive, suggesting that the economy picked up in the second quarter of the year.”
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However, he said the economy’s underlying growth trend remains low, mainly due to persistent supply-side problems, such as logistics. Higher levels of uncertainty also seem to have affected output, with business and consumer confidence deteriorating in the first half of the year.
“However, we still expect modestly higher growth in the coming years, supported by ongoing structural reforms. The risks to the growth forecast are assessed as balanced.”
Inflation moderated, rand is stronger
Moving to inflation, Kganyago said the rand has strengthened and inflation expectations have moderated.
“The June CPI print showed headline inflation at 3% and core at 2.9%, still at the bottom of our target range. However, food inflation increased, mainly due to meat prices. Fuel prices are also falling more slowly now, compared to the recent past.
“We therefore expect headline inflation to increase over the next few months, averaging 3.3% for the year, in line with our earlier forecasts. Prices should then stabilise around the target objective over the rest of the forecast period. The risks to this outlook appear balanced.”
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Kganyago said against this backdrop, the MPC decided to reduce the repo rate by 25 basis points to 7%.
He also pointed out that at its previous meeting the MPC considered a scenario with a 3% inflation objective. “We did this based on analysis that our 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.”
MPC steps to lower inflation target for repo rate
Therefore, the MPC updated the 3% forecast for this meeting. Kganyago said, like the projections based on the target midpoint, this showed a near-term rise in headline inflation. “However, a key difference between the two forecasts is what happens to core inflation.
“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.
“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 and therefore inflation reverts to 4.5% instead.”
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For policy, as the MPC showed in May, lower inflation allows for lower interest rates, he said.
“In our Quarterly Projection Model, for a 4.5% objective, rates bottom out around 7%. By contrast, the forecast for a 3% objective has roughly five more cuts over the medium term, taking interest rates slightly below 6%.
“The logic of the model is that interest rates must fall as inflation eases to prevent the inflation-adjusted rate, or real interest rate, from rising too much. Real rates are nonetheless temporarily higher for a 3% objective and there is a modest growth sacrifice, which helps to anchor expectations at lower levels.”
Benefits of lower inflation target
Kganyago said over the past few months the prospect of a lower inflation target has bolstered the rand and lowered long-term borrowing costs. “It is important to sustain this progress and minimise uncertainty about the longer-term objectives of monetary policy.”
Therefore, he said, the MPC now prefers inflation to settle at 3%.
“In line with this, we decided to aim for the bottom of our inflation target range of 3-6%. We welcome the recent moderation in inflation expectations and would like to see expectations fall further.
“This would expand policy space and make our framework more robust to shocks. We will use forecasts with a 3% inflation anchor at future meetings. The Sarb will also continue working with the National Treasury to complete target reform and achieve permanently low inflation.”
He emphasised that the challenges of the global environment highlight the urgency of domestic reform for accelerating growth. “The Sarb’s main contribution is to deliver price stability. We have an opportunity now to lock in low inflation and clear the way for sustainably lower interest rates.
“Additional measures that would improve economic conditions include reaching a prudent public debt level, strengthening network industries, lowering administered price inflation and keeping real wage growth in line with productivity gains.”