The Reserve Bank has gone it alone in effectively shifting SA’s inflation target to 3%, surprising market players who had expected the move to come only when the minister of finance announced it during October’s medium-term budget statement.
The Bank announced the move during Thursday’s monetary policy committee (MPC) briefing along with a 25 basis-point cut in the benchmark repo rate to 7% as expected, and said inflation is expected to average 3.3% in 2025.
The Bank has for the past four years called for the target be lowered to make SA more competitive and ensure permanently lower inflation and interest rates.
It has stepped up that campaign in recent months as inflation has trended lower to 3% or less, making it easier to set a lower target with less economic pain.
Since 2017 the Bank has targeted the 4.5% midpoint of the official 3%-6% target range. But governor Lesetja Kganyago said on Thursday the Bank would now aim for the bottom of the range.
“All that we are doing today is to do exactly what we did in 2017 and say we prefer that given where the inflation rate is we prefer that we lock the gains there, and within this inflation target range we shall aim for the bottom of the range, which happens to be 3%,” Kganyago said.
The Bank’s 3% scenario, which it first published at May’s MPC meeting, points to as many as five rate cuts over the next couple of years, bringing the repo rate below 6%, as opposed to the 7% end point indicated by the 4.5% scenario.
Still, that assumes inflation expectations decline towards the new target and the rand strengthens. After the 2017 move it took about four years for expectations to decline to 4.5%.
The Treasury published a macroeconomic review last year in which it said a lower target should be considered. However, director-general Duncan Pieterse recently said the Treasury was still doing its own modelling.
While finance minister Enoch Godongwana has expressed broad support for the idea of a lower target and said it should be agreed by the minister and the governor, it is not clear whether he has been able to rally political support for that.
Kganyago made it clear the Bank had chosen its wording carefully, and that 3%-6% was still the inflation target.
Deputy governor Fundi Tshazibana noted there is a joint Treasury/Bank inflation targeting technical committee and that technical work was being done by both teams.
But Kganyago said forecasts would now be based on the new 3% anchor. The Bank “will also continue working with the National Treasury to complete target reform and achieve permanently low inflation”.
Unanimous
The repo rate decision on Thursday was unanimous and takes the benchmark rate to the lowest since November 2022.
“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,” Kganyago said.
The Bank has revised its GDP growth forecast for the second and third quarters to 0.4% quarter on quarter — up 0.1 percentage point from its May projection.
On Thursday, the Bank presented models comparing a 4.5% inflation target to 3%. “Expectations settle around a ‘new normal’ of 3% during 2027, as stakeholders observe lower inflation and learn about the new target,” Kganyago said.
“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, so inflation reverts to 4.5% instead,” he said.
An important difference between the two forecasts was what would happen to core inflation, he said. With a 3% objective, core inflation would remain roughly where it is now — close to 3%.
The July scenarios also showed marginally higher GDP growth under the 3% target when compared with growth under a 4.5% target.
“This would expand policy space and make our framework more robust to shocks,” Kganyago said. “The challenges of the global environment highlight the urgency of domestic reform for accelerating growth,” he said.
FNB chief economist Mamello Matikinca-Ngwenya said: “While we expected the MPC to reflect more restraint amid a contentious global trade environment that could intermittently weigh on sentiment, lift the cost of borrowing and weaken the rand, today’s decision is not a surprise. It highlights the MPC’s focus on stable domestic conditions.”
With the prime lending rate now at 10.5%, property groups also welcomed the rate cut. Pam Golding Property CEO Andrew Golding said Thursday’s rate cut, coupled with a reduced fuel price and the still subdued consumer inflation rate, “is expected to support first-time buyer demand in the months ahead as this sector of the market is extremely sensitive to interest rates”.
The rand was last trading 1.17% weaker at R18.1932/$, having earlier depreciated to as much as R18.21/$, after the announcements as investors weighed up the prospect of diverging monetary policies between the US and SA, along with escalating trade tension.
US tariffs — including a 30% duty on SA exports — are set to take effect on Friday.
Update: July 31 2025
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