The news out of the Reserve Bank’s monetary policy committee meeting was notable for at least two reasons. One was that the committee’s take on the inflation outlook, and the views of its members, proved unexpectedly dovish. The other, related to this, was that the Bank is clearly keen to seize the low-inflation moment to push ahead with lowering the inflation target — and has stepped up its campaign to win support.
The committee agreed on a 25 basis point (bps) rate cut, though one of its members would have preferred 50 bps. That in itself was an important, and unexpected, dovish signal. A while ago most in the market weren’t expecting a cut at all at this meeting. Going into the meeting opinions shifted rapidly, and in the end most analysts expected a 25 bps cut. But while some expected that the committee might split, with some wanting to hold, almost no-one seems to have expected a vote for a 50 bps cut.
That there was one shouldn’t be too surprising though. The Bank didn’t just tweak its forecasts for inflation and growth: it cut them quite significantly. It now forecasts inflation to average just 3.2% this year, down from its 3.6% forecast in March, with the 2026 forecast cut from 4.5% to 4.2%. The important core inflation metric is seen averaging just 3.3% this year and 4.1% next year. Even in 2027 it hardly rises above the 4.5% the Bank targets.
Governor Lesetja Kganyago has long urged a lower inflation target, and the debate has hotted up in recent months with a Bank-Treasury conference on the subject.
The new forecasts reflect stronger assumptions about a “more settled” exchange rate as well as lower oil global oil prices. It’s quite a shift from the more alarmist warnings about global riskiness of a couple of months ago. Sadly, forecasts for SA’s growth were also cut significantly, which takes even more pressure off inflation.
What all of that means in effect is that even a 25 bps cut isn’t really a cut in real terms. With inflation a year or two out now expected to be more than 30 bps lower than the Bank previously expected, the latest cut means the real (inflation adjusted) interest rate is just as restrictive as it was before, even a bit more so — and in an economy that’s rapidly slowing. No wonder one member wanted a larger cut, and that the committee’s narrative leant more dovish than hawkish.
It is still warning loudly about adverse global risks, with as much uncertainty as ever about US President Donald Trump’s tariffs and their likely effect on the US and the world. But while those are expected to raise inflation in the US itself, some economists now believe they could be disinflationary for the rest of the world. It all makes life interesting for central bankers.
The question is what happens next. Some economists have upped their expectations for further rate cuts this year. But the committee’s likely moves will depend not just on how the numbers and the forecasts play out, but also on news item number two from the committee meeting — the inflation target itself. Governor Lesetja Kganyago has long urged a lower inflation target, and the debate has hotted up in recent months with a Bank-Treasury conference on the subject.
Last week, for the first time, the committee published a scenario showing that if it had a 3% objective and got inflation expectations down in line with the lower target, the path of interest rates would be lower in future. It will update the 3% scenario at each meeting, but this first one came as a surprise given that most had expected that if the Bank were to target the lower number it would have to keep interest rates higher for longer to achieve this.
That would have a negative effect in the short term even if it would be growth positive in the longer term. Instead, the Bank’s scenario now paints an encouraging picture that might win it some popular votes for a lower cost of living.
Whether it can win over the politicians’ vote remains a question, likewise whether the market will believe the scenarios. But the target is now clearly in play.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.