Standard Bank shares good news about inflation and interest rates

Inflation is no longer expected to tick up as sharply throughout the second half of 2025 as initially projected at the beginning of the year, ending with an average rate of 3.4%. 

This will give the Reserve Bank a wider window to cut interest rates, easing the financial pressure on South Africans. 

Crucially, lower inflation will also translate into boosted consumer spending as real wage growth for South African workers remains strong. 

This is feedback from Standard Bank chief economist Goolam Ballim, who told Daily Investor how he expects South Africa’s inflation story to play out for the rest of 2025 and beyond. 

“We think inflation will stay comfortably within the lower half of the Reserve Bank’s 3% to 6% target range,” Ballim said. 

The bank forecasts inflation to average 3.4% in 2025, with a slight uptick to 4.2% in 2026 and 4.1% in 2027 – all below the Reserve Bank’s current 4.5% midpoint.

Lower inflation is crucial for South Africa’s economy at this point in time, with much of its meagre growth driven by household spending.

With lower inflation comes higher real wages, which translates into increased consumer spending and, thus, economic growth. 

Ballim said this is a virtuous cycle that is further enhanced by lower interest rates and structural economic improvements, such as reduced load-shedding and a stabilisation in Transnet’s performance. 

Another benefit of the country’s lower inflation is that it has helped to reduce uncertainty in the local economy and increase efficiencies. 

One of the main reasons why inflation forecasts have moderated has been the limited impact of tariffs so far, with increased duties on trade expected to push inflation higher. 

With repeated delays to the deadline for trade negotiations with the United States and some trade deals being struck, the impact has been far less severe than expected. 

Ballim explained that another factor that has helped South Africa is the dollar’s relative weakness in 2025, which is seen as rand strength. This has mitigated the impact of higher oil prices and imported inflation. 

Overall, lower expected inflation should give the Reserve Bank further room to cut interest rates in the second half of 2025, further easing financial strain on households and boosting the local economy. 

Lower inflation target headache

Ballim said one factor that may alter this outlook is the expected implementation of a lower inflation target, which may require the Reserve Bank to keep rates elevated for longer. 

“We appreciate that there is much debate surrounding the potential for lowering the inflation target and the benefit that might have for South Africa,” Ballim said. 

“On one side of the view, the target change is imminent, given South Africa’s currently low inflation rate, and the other side sees significant challenges.” 

Ballim explained that now would be the perfect time to lower South Africa’s inflation target due to the country’s low inflation rate, minimising the need for restrictive monetary policy to reach the target. 

However, this does not come without challenges, with South Africa’s poor economic growth posing a major headache in lowering the target. 

“The politics of the moment may dictate that when growth is weak, lowering the target now and the associated growth costs in the form of tight monetary policy is not something South Africa can afford,” Ballim said. 

The impact on growth may be overstated as a lower target will inform lower inflation expectations and thus, less need for tighter monetary policy, particularly if the timing is right. 

“The penalty to reach the new target would be very, very small because inflation expectations are, by nature, adaptive. The low level of inflation will inform expectations,” Ballim said. 

“If the target is calibrated to 3%, for instance, in the immediate term, inflation expectations will adjust. If they adjust quickly, there would be less of a need for a tighter monetary policy to achieve the lower target. 

However, the Reserve Bank may exercise caution and keep interest rates at their current levels to ‘lock in’ lower inflation and maintain its credibility. 

A lower inflation rate in South Africa promises immense benefits, such as reduced debt-servicing costs, faster growth, and improved standards of living.