According to Stats SA, consumer prices increased by only 3.6% in October compared with the same period last year. This recorded inflation rate once again fell below analysts’ expectations, reflecting a trend observed throughout the year.
Notably, this level of consumer price index (CPI) inflation might be the highest observed for some time. Projections suggest that inflation will remain at these levels until the middle of 2026, after which it is expected to decline to a 3%-3.5% range in the latter half of the year. This trajectory brings the Reserve Bank’s 3% target within reach.
Currently, domestic and global factors are contributing to disinflation. Prices for soft commodities, such as food and fuel, are subdued. The global need to redirect trade away from the US has reduced price pressures, and prices for durable goods — including televisions, microwaves, washing machines and cars — are notably low outside the US.
The rand remained stable during 2024 and has strengthened in 2025, further contributing to disinflation. Additionally, modest wage growth and relatively contained administered prices have helped keep price rises in check locally.
Other factors will also control inflation over the long term. The finance minister and the Treasury have delivered on fiscal consolidation, contributing to macroeconomic stability and lower structural inflation in the long term. Eskom’s improved financial performance should result in more moderate electricity tariff increases in the future.
Furthermore, the confirmation of a lower inflation target by the Treasury in the medium-term budget policy statement (MTBPS) will help anchor lower inflation expectations. As a result, the compression of inflation expectations is likely to persist.
The Bank estimates real interest rates at 2.9%, indicating that policy is tight by about 70 basis points, or the equivalent of three cuts of 25 basis points.
The Bank’s monetary policy committee (MPC) typically focuses on the long-term outlook for inflation, acknowledging that the influence of monetary policy has a lag of about 12-18 months. Nonetheless, current data does inform the projected path. The 3.6% figure for October suggests inflation may have peaked below the 4% forecast by the Bank in November. A further reduction in forecasts at the next MPC meeting will strengthen the case for interest rate cuts.
MPC members have consistently described the current monetary policy stance as tight. The repo rate stands at 7%, which is 3.6% above the current inflation rate. The Bank estimates real interest rates at 2.9%, indicating that policy is tight by about 70 basis points, or the equivalent of three cuts of 25 basis points.
Although determining the optimal repo rate is complex and these figures should be interpreted with caution, additional indicators — such as trends in the current account, credit growth and GDP growth — also suggest that monetary policy remains tight.
Historically and relative to peer countries, the repo rate is high in real terms, and such a restrictive stance may no longer be justified. The Bank’s recent actions to buy dollars, partially to prevent the rand from appreciating too quickly, further signal that interest rates may be excessively high.
Prerequisites met
The Bank’s traditionally conservative approach may be heightened by concerns over potential turmoil in US financial markets and ongoing market volatility. The rand has weakened in recent trading sessions, reflecting sustained risk aversion amid a possible correction in US technology stocks.
In the event of such a correction, the Bank should be prepared to lower rates. A reversal of the AI-driven rally would tighten financial conditions and negatively affect global growth, making monetary easing even more urgent.
With conditions favouring monetary policy easing, the stage is set for the Bank to reduce interest rates significantly. The necessary macroeconomic and political prerequisites have been met, and it is now up to the MPC to respond.
There could be up to four rate cuts, with interest rates potentially falling as low as 6% over the next 12 months. The process should begin with a cut at this week’s MPC meeting.
• Lijane is a global markets strategist at Standard Bank CIB.
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