The MPC has decided to reduce the policy rate by 25 basis points, to 7%, with effect from 1 August, 2025. The decision was unanimous, and brings the prime lending rate to 10.50%.
Source: Reuters. South African Reserve Bank's Lesetja Kganyago.
The announcement falls in line with the predictions of many economists' predictions, among them Andre Cilliers, currency strategist at TreasuryONE who forecast that if the central bank were to lower its main lending rate, it could be the last cut for the current cycle given the tariff unease.
In a research note, however, ETM Analytics said that with such tariff uncertainty, it is counterintuitive for the Sarb to be reducing interest rates.
Sarb, however is aiming for stability.
Kganyago said with a 3% objective, core inflation stays roughly where it is currently, which is close to 3%.
"Expectations will settle around a ‘new normal’ of 3% during 2027, as stakeholders observe lower inflation and learn about the new target," he noted. "Inflation also benefits from a somewhat stronger rand."
Inflation target shift
For policy, lower inflation allows for lower interest rates," he added.
"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 need to 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 anchor expectations at lower levels," Kganyago said.
Kganyago's assessments show that 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 to minimise uncertainty about the longer-term objectives of monetary policy," he said. "Therefore, the MPC now prefers inflation to settle at 3%. In line with this, we have decided to aim for the bottom of our inflation target range, of 3-6%."
