Good news about interest rate cuts in South Africa

Despite its lower implicit inflation target of 3%, the Reserve Bank has room to cut interest rates once more in 2025, as inflation expectations have declined. 

Furthermore, inflation may surprise to the downside in the coming months as fuel prices are set to come down due to a surplus in the supply of oil and a relatively stable rand. 

This will likely result in the level of real interest rates being relatively high and probably unnecessarily elevated, given South Africa’s weak economy. 

Stanlib chief economist Kevin Lings explained that the the Reserve Bank has increased room to cut interest rates despite inflation moving further away from its stated implicit target of 3%. 

The September 2025 inflation reading revealed that prices rose by a modest 0.2% month-on-month, in line with market expectations. 

This pushed the annual rate of inflation up from 3.3% in August to 3.4% in September, moving it further away from the Reserve Bank’s preferred 3% target. 

However, Lings said this does not mean that interest rate cuts cannot occur in South Africa, with inflation remaining relatively subdued. 

Lings explained that inflation has remained relatively stable and subdued within a narrow range of 2.7% and 3.3% from October 2024 to September 2025. 

While it is expected to drift higher over the next 12 months, this shows that inflation has been largely contained and, with the Reserve Bank stating its implicit aim of 3% inflation, expectations should come down further. 

Crucially, the latest inflation data showed that food prices have declined for the second consecutive month, after rising more than expected between April and July. 

“The latest inflation data should further encourage the Reserve Bank to consider cutting rates by a further 25 basis points before the end of the year – despite its 3% inflation goal,” Lings said. 

“A cut of 25 basis points would not be in complete conflict with the recent downward revision to the Reserve Bank’s inflation objective of a sustained 3%.”

This is because South Africa’s inflation expectations have recently declined further, while any downside surprise in the actual rate of inflation keeps the level of real interest rates relatively high. 

Lings said a downward surprise in inflation will probably make South Africa’s real interest rates unnecessarily high, constraining economic growth. 

The graph below, courtesy of Lings and Stanlib, shows the sideways trend of inflation over the past 12 months. 

Not all good news

Despite this, there is no guarantee that interest rates will be cut in South Africa in the coming months, with the Reserve Bank wanting to maintain its inflation-targeting credibility. 

To ensure this credibility, it would prefer to keep inflation close to its implicit target of 3%, which will drag expectations down in line with the new target. 

Keeping inflation near the 3% target is also crucial for limiting the potential negative impact of an explicit shift to a lower target. This explicit shift will have to be made by the National Treasury. 

If inflation accelerates significantly higher than this target, it will make it increasingly difficult for the Reserve Bank to bring price increases down to the targeted level. 

This will likely result in interest rates remaining higher for longer and potentially even increasing, negatively impacting economic growth. 

Lings explained that inflation is expected to increase over the next year as positive base effects roll off and administered price increases continue to place upward pressure on inflation. 

Reserve Bank Governor Lesetja Kganyago has repeatedly come out in support of a lower inflation target by outlining its potential benefits. 

Kganyago has explained that a lower inflation target, if met, will result in significantly lower interest rates in South Africa. 

This will not only ease the financial pressure on South African households but also bring substantial relief to the government in the form of reduced debt-servicing costs. 

More importantly, a lower inflation target will bring South Africa in line with developed economies, reducing the inflation differential that has largely driven the continued weakness of the rand. 

It will also encourage investment by promising investors increased security of capital and stability, potentially boosting economic growth. 

Reserve Bank researchers estimated that a lower inflation target of 3% can result in additional GDP growth of over 0.25% per year over five years and 0.4% per year within a decade. 

In the researchers’ baseline scenario, debt-servicing costs as a percentage of GDP are projected to decline from 5.4% in 2025 to 5.3% in 2030 and 4.8% in 2035. 

This compares to debt-service costs that fall to 5.1% of GDP in 2029/30 and 4.2% of GDP in 2034/35 as the move to a lower inflation target reduces inflation, lowers short-term interest rates, strengthens the currency and supports a decline in real yields.