Good news about interest rate cuts in South Africa

The South African Reserve Bank has room to cut interest rates when its Monetary Policy Committee (MPC) meets on 29 May. 

This is likely to translate into a 25-basis-point cut to 7.25%, with the bank expressing caution regarding global risks for the remainder of the year. 

Momentum Investments’ chief economist, Sanisha Packirisamy, explained that local inflation remains below the Reserve Bank’s 3% to 6% target range and global tensions appear to have eased. 

With lower oil prices, a stronger rand, and weak economic growth, Packirisamy expects the Reserve Bank to lower its 2025 inflation forecast from 3.6%. 

The scrapping of the VAT hike, which was expected to push inflation higher, will only add downward pressure to the outlook. 

South Africa’s latest inflation reading showed that price increases accelerated slightly to 2.8% year-on-year in April from 2.7% in March. 

Crucially, at its current levels, all key measures of inflation, across headline, core, goods and services, remain below the midpoint of the Reserve Bank’s target range. 

These domestic factors have been coupled with easing trade tensions between the United States and China, which significantly reduces the risk of a global recession and an inflationary spike. 

Signs of de-escalating trade tensions following the United States lowering tariffs on Chinese goods from 145% to 30%, and China reducing tariffs from 125% to 10% on US goods for a 90-day period. 

As a result, Packirisamy said that Momentum Investments expects one more interest rate cut to 7.25% before proceeding with caution thereafter. 

While the bias is for another cut thereafter, the MPC will likely maintain a cautious approach to easing monetary policy too far below the neutral level, given ongoing global and local risks.

Old Mutual chief investment strategist Izak Odendaal echoed Packirisamy’s view, saying that the rand’s recent strength supports an interest rate cut. 

The rand-dollar exchange rate has stabilised after the steep decline in the wake of the 2 April tariff shock, bouncing back from a low of R19.89 on 8 April as global markets were gripped by panic. 

As global investors started relaxing, the rand regained lost ground, repeating a pattern we’ve seen many times before. 

If global market conditions stabilise, the Reserve Bank can place more emphasis on domestic inflation dynamics, which suggests interest rate cuts.

Inflation target change

Despite this good news, Packirisamy said that a potential lowering of the Reserve Bank’s inflation target to 3% may result in it keeping interest rates unchanged for longer. 

Some economists have said that they think the Reserve Bank is already implicitly targeting 3% inflation, as this would bring the country more in line with its global peers. 

However, this does mean that interest rates are likely to remain elevated to keep inflation at around 3%, limiting the scope for further cuts. 

Head of portfolio management and analytics at PPS Investments, Mark Phillips, said that such a change may boost the rand and result in lower imported inflation, potentially giving the Reserve Bank more room to cut interest rates. 

The Treasury and the central bank recently announced that they are engaged in the development of an appropriate inflation framework for South Africa. 

An announcement is expected soon, which has contributed to the rand’s appreciation and a decline in government bond yields. 

Governor Lesetja Kganyago has long argued that a 3–6% band is “too wide” and that a single-point target of around  3% would better align with peer central banks and anchor expectations more tightly.

Higher real rates tend to attract capital, supporting both bond inflows and currency strength. Markets have reacted by sending the rand stronger and driving down government bond yields ahead of any formal announcement. 

With expectations now shifting toward a tighter inflation anchor, foreign investors may see reduced risk of surprise rate cuts and more predictable real returns on South African fixed income. 

It remains to be seen whether this dynamic will encourage capital flows into government bonds, exerting downward pressure on yields while easing government funding costs.