SA could be in line for a credit rating upgrade from S&P Global Ratings on Friday and a possible interest rate cut at next week’s monetary policy committee meeting after Wednesday’s medium-term budget policy statement (MTBPS) and the announcement of a new 3% inflation target.
The change from the previous 3%-6% target represents the biggest monetary policy reform in 25 years. The 3% target has a one percentage point tolerance band on either side to accommodate unexpected inflationary shocks.
The immediate lowering of the inflation target to 3% is expected to decrease inflation expectations and inflation, creating room for lower interest rates, finance minister Enoch Godongwana said in his MTBPS in the National Assembly.
The announcement of the new target and the Treasury’s commitment to it would be welcomed by the markets as it should provide further support to domestic assets, Oxford Economics senior economist Jee-A van der Linde said in a note.
“We now expect the [Reserve Bank] to cut 25 basis points at next week’s meeting,” Citi economist Gina Schoeman said, adding that a credit ratings upgrade by S&P Global on Friday is looking “increasingly likely”.
The ratings agency had previously warned that tensions between the Treasury and Bank over inflation targeting could undermine the credibility of monetary and fiscal policy.
Sisamkele Kobus, fixed-income analyst at SA’s largest asset manager, Ninety One, said: “If the government sustains this momentum, it will not only bolster the case for a sovereign ratings upgrade but, more importantly, lay the groundwork for stronger, more inclusive growth."
The rand strengthened 0.43% against the dollar, while the JSE all share index rose 1.48%.
“The new fiscal projections seem credible and underpinned by relatively conservative assumptions. The key fiscal metrics were broadly as we expected; the Treasury is gradually restoring SA’s fiscal sustainability,” said Elna Moolman, Standard Bank group head of SA macroeconomic research.
Godongwana said the expected positive trends would support household spending and business investment, boosting economic growth and job creation. But he acknowledged that “the short-term fiscal costs of a lower target, which include lower nominal GDP and revenue growth, will make achieving fiscal targets more challenging.
“Yet the long-term benefits of taking this step far outweigh these costs.”
Earlier during a media briefing Reserve Bank governor Lesetja Kganyago said there was only one winner from the decision. These are the South Africans “who are now going to enjoy a low-inflation economy, which would mean that the consideration about inflation would be taken out of the decision-making process of investors and out of the purchasing decisions of our price setters”.
The unity between the Treasury and Reserve Bank sent a strong message about the monetary policy stance, which will assist in lowering inflation expectations.
The MTBPS highlighted improvements in the government’s fiscal position. It showed that the government remained on track to achieve its fiscal consolidation and debt stabilisation policies. Debt is due to stabilise this year.
The debt-to-GDP ratio stabilised in 2025/26 at 77.9%, falling progressively to reach 77% in 2028/29. The consolidated budget deficit is forecast to fall from 4.7% (4.8% in the May budget) to 2.9% in 2028/29.
The primary budget surplus — when revenue exceeds non-interest expenditure — is forecast to improve from 0.5% of GDP in 2023/24 to 2.5% of GDP (R224bn) in 2028/29 and will support a decline in debt and debt service costs, which this year will consume 21c of every rand in revenue. Debt service costs have declined this year due to lower government borrowing rates.
Read: MTBPS shows marginal fiscal gains while debt costs weigh on outlook
The Treasury has lowered its economic growth forecast for 2025 to 1.2% from 1.4% in the May budget and to 1.5% (1.6%) in 2026 but it is forecast to pick up to 1.8% in 2027 and reach 2% in 2028.
Contributing to the improved fiscal outlook has been higher tax collections, with the gross tax revenue estimate for 2025/26 being revised upwards by R19.7bn due to higher net VAT collections and corporate income tax. In the first six months of the 2025/26 year, tax revenue was R17.5bn over 2025 budget estimates.
The higher revenue projection and lower-than-expected borrowing costs allow for a R15.8bn increase to 2025/26 non-interest expenditure estimates mainly targeted at infrastructure projects and the 2026 local government elections. Part of the revenue overrun will expand the contingency reserve from R5bn to R13.5bn, which will be used for these purposes.
Debt service costs in 2025/26 will be R4.8bn lower than the 2025 budget estimate supported by lower interest rates, lower inflation and a stronger rand. Consolidated government expenditure is forecast to increase from R2.59-trillion in 2025/26 to R2.88-trillion in 2028/29, growing by an average annual rate of 3.6%.
More on the medium-term budget:
Treasury and Reserve Bank set new 3% inflation target
MTBPS reallocates modest fiscal room — who gains and who loses
Treasury lowers growth forecast with eye on protectionism
Finance minister voices concern about health’s plan to scrap medical tax credits
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