Good news about interest rate cuts in South Africa

Many economic experts expect South Africa’s Reserve Bank to continue cutting interest rates in 2026, as lower inflation expectations and a new target provide room for further reductions.

While it is not yet clear which way the Monetary Policy Committee will lean at its January meeting, experts have pencilled in two interest rate cuts for 2026.

Momentum Investments economists Sanisha Packirisamy and Tshiamo Masike recently outlined their interest rate expectations for 2026.

Packirisamy and Masike explained that November’s unexpectedly low inflation reading, as well as a notable decline in inflation expectations, support their view that South Africa remains on an interest rate-cutting path.

South Africa’s latest available inflation reading showed that CPI eased to 3.5% in November 2025, down from 3.6% in October.

This outcome was surprising, with many experts having predicted a rise in inflation for November.

In addition, the Bureau for Economic Research’s (BER) latest inflation expectations survey showed that expectations fell among all respondent groups, reaching 3.8% for 2026 and 3.7% for 2027.

While still higher than the Reserve Bank’s new inflation target of 3%, these lower expectations and the lower inflation reading provide a strong impetus for the Monetary Policy Committee (MPC) to continue its interest rate-cutting cycle, which began in 2024.

Since the first cut of the cycle in September 2024, the MPC has cut South Africa’s interest rates by a cumulative 150 basis points, with the latest cut implemented in November 2025.

Packirisamy and Masike expect the MPC to keep the rate-cutting cycle going in 2026, having pencilled in two 25 basis point cuts for the year.

This would bring South Africa’s repo rate to 6.25% and the prime lending rate to 9.75%, levels last seen in October 2022.

While the MPC is set to meet again on 29 January 2026, Packirisamy and Masike expect the committee to maintain interest rates at current levels, with cuts only expected later in the year.

Closer to target

One of the factors the MPC will keep a close eye on in 2026 is inflation expectations, with the committee hoping to see projections fall to the new 3% inflation target.

While inflation expectations fell in 2025, they remain far higher than the Reserve Bank’s new target, which was made official in November 2025.

Reserve Bank Governor Lesetja Kganyago has made it clear that, going forward, the MPC will set policy so that inflation always returns to 3%.

“Most of the time, we should be expected to keep inflation within the tolerance band, with breaches occurring only when there are severe shocks,” he said in the MPC’s November statement. 

Packirisamy and Masike explained that inflation expectations may be becoming more forward-looking in nature.

In the latest BER survey, one-year-ahead inflation expectations fell to 3.8%, while both the two-year-ahead measure and the five-year expected average declined to 3.7%.

In addition, all respondents – including analysts, businesses and trade unions – adjusted their inflation expectations downward across all time horizons.

“The significant drops in inflation expectations signal that respondents see the shift to a lower inflation target of 3% as credible, particularly following the formal adoption of the new target in the 2025 medium-term budget,” the economists said.

However, they noted that there is still progress to be made, with expectations hovering around 3.7% and 3.8%, far above the 3% target.

This is partly why Packirisamy and Masike expect the MPC to keep interest rates unchanged at its January meeting.

This view is further supported by the Reserve Bank’s caution regarding ill-timed interest rate cuts.

In November 2025, Kganyago explained that monetary policy actions have their main effects on prices after 12 to 24 months, meaning South Africans should expect the MPC to achieve its target over that horizon. 

“Accordingly, we want longer-run expectations to anchor at 3%, staying there even when there are shocks,” he said. 

“This lag, between monetary policy decisions and outcomes, also explains why the 3% target is taking effect now, but will be achieved over the forecast period.”