One thing threatening lower inflation and interest rates in South Africa

South Africa’s rising electricity tariffs threaten the move towards a lower inflation target and reduced interest rates in the future. 

Alongside other administered prices for services such as water, education, refuse removal, and sanitation, electricity prices have outstripped inflation in recent years. 

This trend is set to continue as Eskom pushes for cost-reflective tariffs to strengthen its finances after a decade of underperformance. 

From 1 July, municipal electricity customers across South Africa saw tariff increases of up to 14%. Households will also face higher charges for water, rates, refuse removal, and other essential services.

If you’re supplied directly by Eskom, you would have felt your increase back in April. But for everyone else, July marks the start of steeper utility bills, and each municipality received a different increase.

This follows years of above-inflation increases in the price of electricity, with Reserve Bank data showing that tariffs have risen by around 12% year-on-year since the start of the pandemic in 2020.

These increases are far higher than the country’s headline inflation rate and play a significant role in pushing prices higher across-the-board. 

In the central bank’s latest Quarterly Bulletin, it said that administered price inflation has accelerated compared to 2024. 

Electricity tariffs make up the largest share at over 26% of the administered price basket and have a larger impact than fuel prices, which only make up 3.8% of the basket.

Furthermore, electricity prices are effectively permanent increases, while fuel prices are highly volatile and have actually contributed to bringing inflation down in 2025. 

To show the impact of electricity prices on administered inflation, if you stripped out their impact for the May rise, administered prices only rose 3.7% compared to 5.2% with electricity price increases. 

With the 14% municipal electricity price increase being applied from 1 July, administered price inflation is expected to rise further. 

Administered price inflation is a key metric for the Reserve Bank, as these services are effectively universal inputs into the economy and raise the entire cost base. 

Thus, significant increases in the price of electricity complicate efforts to ‘lock in’ lower inflation around 3% and enable interest rates to be cut. 

The graph below from the Reserve Bank shows various administered prices and their year-on-year increases since 2020. 

Lower inflation target under threat

Repeated above-inflation electricity price hikes also threaten the Reserve Bank’s efforts to implement a lower inflation target of 3%. 

The bank has been pushing for a lower target to bring South Africa in line with its peers regarding inflation rates, potentially boosting economic growth and lowering the cost of capital in the country. 

Since 2000, South Africa has had an inflation target range of 3% to 6%, which is relatively high and wide compared to its emerging market peers. 

There were plans to lower this target range over time, but due to macroeconomic conditions, these changes were not made. 

The main problem in implementing a lower inflation target is the potential for interest rates to remain elevated for a period of time to lock in lower inflation. 

South Africa’s headline inflation rate has been below the lower end of the Reserve Bank’s target range for the past few months, making this a good opportunity to lower the target without much pain. 

However, elements such as the sharp electricity price increases pose a challenge in implementing a lower inflation target. 

Citadel Global director Bianca Botes explained that it is important to note that lowering the inflation target is not simply a matter of announcing a new number. 

“It requires a shift in expectations across the economy. When the central bank signals a credible commitment to a 3% target, inflation expectations begin to adjust downward,” she explained. 

“This, in turn, influences wage and price-setting behaviour, leading to lower actual inflation and, over time, lower nominal interest rates.”

Bored warned that a lower inflation target can lead to more cautious interest rate policies and dampen infrastructure investment, making it important for the Reserve Bank to manage the transition carefully. 

 However, this onus is not only on the SARB, as fiscal policy should also play a supporting role, with measures to control public spending and align wage and price-setting practices with the new target.

 In addition, Botes noted that administered prices, such as those for electricity, water, and transport, are a particular challenge. 

She explained that the government or regulators often set these prices and can be slow to adjust to changes in inflation. These prices are often increased above inflation and play a significant role in South Africa’s inflation rate.