Positive Outlook for Interest Rate Cuts in South Africa

South Africa is receiving encouraging signals on the future direction of interest rates, with expectations that borrowing costs could continue to ease through 2026. Standard Bank, the country’s largest financial institution by assets under management, has indicated that the interest rate cutting cycle is not yet over and that further relief is likely in the coming year.

Key Takeaways

• Lower inflation target reshapes policy direction: The move to a 3% inflation objective represents a clear break from South Africa’s historically higher inflation framework and signals a longer-term commitment to price stability.
• Clear roles require stronger policy alignment: While the government sets the inflation target and the SARB implements it, effective coordination between fiscal and monetary policy is essential to ensure credibility and economic stability.
• Market expectations adjust ahead of rate changes: Changes to the inflation framework tend to influence investor sentiment, bond yields and currency trends well before interest rates are actually adjusted.

South Africa’s Shift to a Lower Inflation Target Signals a New Monetary Policy Era

The bank highlighted that South Africa has entered a new phase of monetary policy following the government’s decision to adopt a lower inflation target. Finance Minister Enoch Godongwana has set a 3% inflation objective, marking a significant shift in how price stability is defined in the country.

While the South African Reserve Bank is responsible for using interest rates and other monetary tools to achieve the inflation target, the authority to set that target rests with the government. This distinction is important, as it highlights the need for alignment between fiscal policy direction and monetary policy execution.

Standard Bank explained that the central bank is already incorporating the new inflation target into its forecasting models and policy considerations. However, the move represents more than a technical adjustment to a headline figure.

A New Inflation Framework and Its Wider Impact

The revised framework includes a narrower tolerance band of one percentage point, which is intended to anchor lower inflation expectations across the broader economy. By reducing uncertainty around future price movements, the framework aims to create a more stable environment for economic decision making.

This development is seen as positive for businesses planning long-term capital investments, as well as for households seeking greater predictability in managing monthly expenses. Lower and more stable inflation also strengthens confidence in both spending and saving decisions.

Periods of inflation stability can help households plan budgets more effectively and improve long-term financial resilience.

Additional support for the lower inflation environment is expected to come from softer food and energy prices, which should continue to ease cost pressures into 2026. A sustained period of lower inflation also improves real returns on investments, as purchasing power is preserved more effectively over time.

How Lower Inflation Supports Borrowers and Investors

With inflation already tracking closer to the new target, monetary policy is expected to remain accommodative. This increases the likelihood of further interest rate reductions over the medium term.

Following cumulative interest rate cuts of 100 basis points during 2025, the South African Reserve Bank is expected to deliver an additional 50 basis points of easing in 2026, provided inflation remains well behaved. This would extend the current easing cycle and provide continued relief to borrowers.

Standard Bank noted that a prolonged period of lower interest rates creates a more supportive environment for wealth accumulation. Reduced borrowing costs lower the expense of credit, while shifts in valuations across bonds, property and other interest rate sensitive assets may open tactical opportunities for portfolio positioning.

The central bank itself has indicated that the repo rate could decline by a further 75 basis points over the next 15 months, potentially reaching 6.0% by March 2027. If this outlook is realised, the prime lending rate, currently at 10.25%, could ease to around 9.5%.

Currency, Markets and Investor Confidence

The strength of the rand was one of the more notable developments in 2025, with the currency gaining against the US dollar over the year. This appreciation helped lower the cost of imported goods, offering some relief to both consumers and businesses.

The primary driver of the rand’s improvement was broad weakness in the US dollar, linked to concerns over American tariff policies. High commodity prices, influenced by ongoing geopolitical tensions, also contributed to pressure on the dollar and supported commodity-linked currencies.

Market consensus suggests the rand could remain relatively stable around the R17 to the dollar level. However, Standard Bank has cautioned that currency movements remain inherently unpredictable and can shift rapidly in response to global developments.

South African equities also enjoyed a strong year, with the JSE All Share Index rising by nearly 40% in 2025. Gold and platinum mining companies were the main contributors to this performance, benefiting from favourable commodity price trends.

What Is Driving Market and Investor Optimism?

Gold miners, in particular, were supported by gold prices moving above $4,000 (approximately R66 000–R67 000) an ounce as investors sought safe-haven assets in a volatile global environment. Trade tensions, conflict in the Middle East and the war in Ukraine remain key drivers of this demand and are unlikely to fade in the near term.

Improved governance under the Government of National Unity has further lifted investor confidence and strengthened belief in the reform agenda. The municipal elections scheduled for late 2026 could provide an additional catalyst if they result in improved service delivery and signal continuity in economic policy.

Conclusion

South Africa’s adoption of a lower inflation target marks a meaningful turning point in its monetary policy framework, with implications that extend well beyond headline figures. By committing to a 3% inflation objective, the government and the South African Reserve Bank are signalling a stronger focus on long-term price stability, which can help anchor expectations across the economy. If supported by consistent policy alignment and credible implementation, the shift has the potential to influence market behaviour positively, support lower interest rates over time and create a more predictable environment for households, businesses and investors alike.