Bad news about interest rate cuts in South Africa

South Africa’s headline inflation rate is expected to pick up in the second half of the year due to increases in electricity and water tariffs, as well as elevated food prices. 

As a result, inflation is expected to average 4.5% in the 2025/26 financial year – the midpoint of the Reserve Bank’s 3% to 6% target range. 

This will make it increasingly difficult for the Reserve Bank to cut interest rates in the second half of 2025 and into 2026. 

Coupled with a potentially lower inflation target of 3%, interest rates may remain elevated for a longer period than initially expected. 

This is feedback from the African Development Bank (AfDB), which outlined South Africa’s precarious economic situation in its most recent Country Focus Report on the country. 

The AfDB also analysed the country’s deteriorating financial health, with government debt threatening to reach unsustainable levels in the coming years. 

As part of this analysis, the bank also shared its overview of the South African economy, upon which it bases its forecasts. 

The AfDB expects GDP growth to marginally recover to 0.8% in 2025 and 1.2% in 2026, as the energy supply improves and the logistics sector becomes increasingly efficient. 

While this is better than 2025, this is a reduction from the bank’s previous forecasts, largely driven by the increased uncertainty driven by shifting US trade policy. 

The bank warned that if South Africa does not address its domestic challenges, then it will be increasingly vulnerable to global shocks. 

Another factor that may limit economic growth in South Africa is its relatively tight monetary policy, with the country having one of the highest real interest rates in the world. 

The AfDB expects this tight monetary policy to continue, with it anticipating inflation to average 4.5% in the 2025 fiscal year. 

This is primarily due to higher food, electricity, and water prices. These prices continue to outstrip inflation and push prices higher across the board. 

The bank said that this is likely to result in the Reserve Bank slowing down its policy rate reductions. 

Electricity tariffs threaten lower inflation target

Repeated above-inflation increases to electricity tariffs threaten plans to lower South Africa’s inflation target and the benefits that would follow. 

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 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.

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.