The Reserve Bank cut interest rates by 25 basis points (bps) citing easing inflation but maintained a hawkish stance amid heightened global uncertainty over US monetary policy. The decision was split, with two of the six monetary policy committee (MPC) members voting for an unchanged rate.
The decision aligns with expectations that the Bank would take a cautious approach as it assessed external threats and potential inflationary pressures. While its decision marks a continued adjustment, the MPC signalled it remained vigilant.
“Today’s announcement by the MPC of a further 25 bps repo rate cut, bringing the prime rate to 11%, is very encouraging news for aspirant home buyers and those with existing mortgages, particularly as the outlook for interest rate relief has shifted significantly during recent weeks,” Pam Golding Property CEO Andrew Golding said.
Adriaan Grové, CEO at MyProperty, added: “While this may seem like a small adjustment, even a slight decrease can have a significant impact on affordability and long-term financial planning.”
“Reserve Bank governor Lesetja Kganyago made a strong point that the MPC will discuss policy meeting by meeting that they’re not providing any forward guidance, that they will watch the data and the circumstances going forward,” Johann Els from Old Mutual said.
The Bank’s decision comes as global monetary policy conditions have tightened, with reduced expectations of rate cuts by the US Federal Reserve and a strong dollar.
At its previous meeting, the Bank had warned of a more challenging external environment and since then, several global risks had materialised, Kganyago said. Inflation risks remained uncertain and the decision also considered external pressures, the global monetary environment and domestic economic performance, he said.
One of the reasons for the decision was that the US monetary policy outlook had shifted. The Federal Reserve held interest rates steady on Wednesday, with no clear indication of when cuts may resume. Core inflation in the US remains above target, and there is even a possibility of further hikes to stabilise price levels. The strong dollar, which has reached a record high, has added pressure to global financial markets.
Kganyago said the Bank was worried about weak global growth. Major economies in Europe and Asia were underperforming. Germany had experienced two consecutive years of contraction, while France and the UK had also posted sluggish growth. China’s economy was decelerating, with very low inflation and interest rate cuts to support demand.
The MPC considered a trade war scenario, which modelled the potential impact of a 10-percentage-point increase in US tariffs. The scenario projected higher global inflation, a weaker rand (potentially reaching R21/$), and a 50 bps higher policy rate at its peak.
While domestic economic activity has faced setbacks, the Bank sees a recovery ahead, which further explains its hawkish approach.
The economy contracted in the third quarter last year, but this was largely due to a sharp decline in agricultural output, which is not expected to have lasting implications.
Kganyago expects growth to rebound in the fourth quarter, supported by a recovery in agriculture, stronger household spending and two-pot pension withdrawals boosting disposable income. Inflation in SA has moderated, helping to create some space for monetary easing. Headline CPI inflation averaged 4.4% in 2023, near the midpoint of the Bank’s 3%-6% target range. In December, inflation slowed to 3%, having started the year above 5%. This was mainly due to favourable goods-price developments, including food inflation reaching 15-year lows, as well as lower fuel costs.
However, the Bank remains cautious, emphasising that these inflationary declines are largely transitory. While inflation is expected to stay in the lower half of the target range through the first half of this year, it is projected to rise towards 4.5% later in the year.
Despite a weaker rand, the effect on inflation forecasts has been limited, as lower price pressures elsewhere have offset currency-driven inflationary risks. Additionally, the latest inflation expectations survey shows that expectations have now aligned with the Reserve Bank’s 4.5% midpoint objective — a critical factor in anchoring long-term price stability.
Kganyago said the Bank’s quarterly projection model suggested that interest rates would drift slightly lower over the next few years, stabilising near 7.25%. He said this remained a broad policy guide rather than a fixed projection, as future decisions would be data-dependent.
The Bank remains concerned about structural constraints on SA’s economy, particularly low investment levels and a slow recovery in mining and manufacturing sectors. However, it is optimistic about long-term growth prospects, expecting GDP growth to reach 2% by 2027, supported by a gradual rebalancing of the economy, higher investment levels, particularly in infrastructure and network industries and recovery in mining and manufacturing output, reversing their post-pandemic underperformance.
“The question is whether the Reserve Bank will announce another reduction of 25 basis points in March,” said Riaan Grobler, head of advisory services at Everest Wealth. “And whether it will also apply the brakes first, with Kganyago again emphasising that global economic uncertainties, and US President Donald Trump’s trade policy pose a risk to inflation and that caution must therefore be exercised.”
North West University Business School economist Raymond Parsons concurred: “Although future MPC decisions are said to be outlook dependent, further cuts in borrowing costs this year would nonetheless further underpin consumer and business confidence.”
During its meeting, the MPC modelled a scenario of accelerated structural reforms, which showed growth reaching 3% by 2027, lower inflation and lower interest rates, underscoring how policy reforms could improve economic conditions and reduce country risk premiums.
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