Interest Rate Outlook Turns Less Favourable for South Africa

Economists at Nedbank are increasingly convinced that the South African Reserve Bank Monetary Policy Committee is likely to keep interest rates unchanged for longer than most market forecasts currently suggest, with the next reduction only expected in the second half of the year.

Key Takeaways

• Rate-cut timing remains uncertain: Economists are split on when the South African Reserve Bank will begin easing policy, with some expecting early cuts while others anticipate a more cautious approach starting later in the year.
• Inflation and the rand are central to the debate: Subdued inflation trends and a relatively strong rand support the case for earlier rate cuts, but global uncertainty and volatile price components argue for patience.
• Markets favour a gradual easing cycle: Market pricing suggests investors expect the first rate cut in March rather than January, reflecting confidence in a slow and measured path towards lower interest rates.

Inflation Pressures Complicate the Path to Lower Interest Rates

In its assessment of the latest consumer inflation figures released by Statistics South Africa, the bank noted that the recent uptick in inflation to 3.6 percent, although broadly in line with expectations, has reduced the likelihood of an imminent interest rate cut.

The increase in inflation from 3.5 percent in November 2025 was primarily driven by higher food prices, fuel costs, as well as rising housing and utility expenses, all of which contributed to renewed upward pressure on headline CPI.

While Nedbank believes that the latest increase in inflation is temporary and partly reflects the low base created during 2025, it still expects inflation to edge higher in the early months of 2026. The bank anticipates that CPI will rise modestly in the first quarter of the year, peaking at approximately 3.7 percent, before gradually easing back towards the 3 percent level later in the year.

On this basis, Nedbank forecasts average inflation of 3.4 percent for 2026, followed by a further moderation to around 3 percent in 2027, provided broader economic conditions remain stable.

Rate Cuts Pushed Out as the Reserve Bank Waits for Clearer Disinflation

Given the mild but persistent near-term inflationary pressures, the bank expects the Reserve Bank to maintain its current interest rate stance throughout the first half of 2026, delaying any rate adjustments until there is clearer evidence of sustained disinflation.

Under this scenario, the earliest opportunity for the next interest rate cut would be July, assuming inflation resumes a clear downward trajectory.

Once inflation shows consistent movement towards the 3 percent target, Nedbank expects the Reserve Bank to restart its easing cycle, delivering a further 50 basis points worth of rate cuts before the end of the year.

Market Volatility and External Political Shocks

In addition to these developments, market volatility was further exacerbated by controversial remarks made by United States President Donald Trump regarding Greenland, which unsettled global financial markets and contributed to currency instability.

Although the President later appeared to soften his stance, which in turn supported global markets and strengthened the rand, the episode underscored how quickly sentiment can shift and how exposed emerging market economies remain to international political developments.

Fuel inflation is also expected to increase modestly in the coming months as base effects from earlier price declines fall away. While this impact is likely to be partly offset by relatively subdued global oil prices and a broadly stable currency, these factors remain closely linked to unpredictable international market movements.

Administered Prices Add to Inflation Pressure

At the same time, higher electricity and water tariffs are expected to exert additional upward pressure on inflation by increasing production and operating costs across the economy.

Eskom could raise electricity prices by as much as 10.5 percent during the year, potentially implemented in April and again in July, should the energy regulator approve the utility’s request to recover an additional R76 billion through higher tariffs.

Market Signals Point to a More Cautious Path

However, a more widely held consensus suggests that the first interest rate cut is more likely to occur at the March MPC meeting, followed by a second reduction in July.

Even among those expecting rate cuts this year, there is recognition that the Reserve Bank may proceed cautiously, potentially delaying its first move until March in order to assess evolving inflation risks.

Market pricing, as reflected in the Forward Rate Agreement curve, indicates that investors do not expect an interest rate cut at the January meeting, although expectations do include a 25 basis point reduction in March.

This more gradual approach reflects the Reserve Bank’s ongoing commitment to anchoring inflation expectations over the medium term and reinforcing its effective inflation target of 3 percent.

Some economists expect the next move in the repo rate to occur in March, coinciding with a decline in CPI inflation to around 3 percent year on year in February, supported by base effects and a generally subdued inflation environment.

Others have also ruled out a January rate cut, arguing that heightened geopolitical uncertainty and renewed inflation pressures warrant a cautious policy stance.

Looking further ahead, some analysts believe that inflation could fall as low as 3 percent during the second quarter of the year, which would push real interest rates closer to the 4 percent level and provide the Reserve Bank with greater flexibility to ease monetary policy later in 2026.

Conclusion

The outlook for interest rates in South Africa remains finely balanced, with policymakers weighing encouraging inflation trends against persistent global and domestic risks. While some economists see scope for earlier rate cuts as inflation stays contained and the rand remains supportive, others argue that caution is warranted given volatile fuel prices, administered cost pressures and geopolitical uncertainty. As a result, the Reserve Bank is likely to prioritise credibility and price stability over speed, favouring a gradual and data-dependent easing cycle that only gains momentum once inflation is firmly anchored near the 3 percent target.