Positive Signals for Interest Rate Reductions in South Africa

South Africa is seeing increasingly favourable conditions for future interest rate cuts, as national inflation expectations have fallen sharply following Finance Minister Enoch Godongwana’s decision to revise the country’s inflation target downward. This shift has strengthened the case for a more accommodative monetary policy stance over the medium to long term.

Key Takeaways

• Inflation expectations have shifted sharply lower: The BER survey shows a broad-based decline in projected inflation for 2026, 2027 and the longer term, indicating growing confidence that price pressures in South Africa will remain contained.
• Policy credibility is influencing economic outlooks: The decision to lower the inflation target to 3 percent has had an immediate impact on expectations, reinforcing trust in the commitment to price stability among analysts, businesses and labour groups.
• Lower inflation supports the case for easier monetary policy: With inflation expectations moving closer to the new target, conditions are improving for interest rates to trend lower over time, supporting borrowers, investment activity and economic stability.

Inflation Expectations Fall Following Lower Target Announcement

Recent findings from the Bureau of Economic Research indicate that average inflation expectations recorded in its latest survey have declined by approximately half a percentage point for the years 2026 and 2027, as well as for the longer five year outlook. This represents a notable change in sentiment across key economic stakeholders.

Participants in the survey, which included trade union representatives, financial analysts, and business leaders, now anticipate headline inflation to average 3.8 percent in the coming year, followed by a further easing to 3.7 percent thereafter. These projections mark the lowest inflation expectations recorded since the survey began tracking these metrics.

The sharp adjustment in expectations followed closely after the announcement in the Medium Term Budget Policy Statement, in which Godongwana formally reduced the country’s inflation target. This policy shift has had an immediate and measurable impact on economic outlooks.

Godongwana revised the target downward to 3 percent, replacing the long standing midpoint target of 4.5 percent that had guided policy for many years. This move signalled a stronger commitment to price stability.

Although the inflation target is set by the Finance Minister, the responsibility for achieving it lies with the South African Reserve Bank, which uses monetary policy tools to influence inflation outcomes.

The Reserve Bank had advocated for a lower inflation target for more than a year, arguing that the previous range of 3 percent to 6 percent was excessively broad and placed South Africa at a disadvantage relative to international peers.

According to the Reserve Bank, narrowing the target would support structurally lower inflation and, over time, allow interest rates to settle at reduced levels, benefiting borrowers and investment activity.

Inflation Trends and Monetary Policy Developments

Data from the latest Bureau of Economic Research survey shows that actual headline inflation remained relatively stable at roughly 3.5 percent between the third and fourth quarters. This stability suggests that inflation pressures remain contained.

Overall inflation continues to fall within a one percentage point margin above the new 3 percent target, a buffer that the Finance Minister explicitly included to account for normal economic volatility and short term shocks.

Since September 2024, the South African Reserve Bank has already reduced interest rates by a total of 150 basis points, bringing the repo rate down to its current level of 6.75 percent. These reductions were implemented in response to persistently low inflation readings.

Economic analysts broadly anticipate additional interest rate cuts in the years ahead, provided the subdued inflation environment is maintained and global conditions remain supportive.

Investec Chief Economist Annabel Bishop has projected that the Reserve Bank could lower the repo rate by a further cumulative 75 basis points by March 2027. This scenario would result in a repo rate of approximately 6 percent, aligning with the Reserve Bank’s own longer term expectations.

Wages and Growth Outlook

In a positive development for income growth, professional groups did not reduce their expectations for wage increases despite the decline in inflation forecasts. This suggests confidence that earnings growth will remain resilient.

They expect salaries to increase by 4.7 percent next year, a figure largely unchanged from the 4.8 percent forecast in the third quarter.

Regarding broader economic performance, survey respondents in the fourth quarter of 2025 projected GDP growth of 1.3 percent for 2026. This outlook closely matches the 1.2 percent growth estimate provided in the previous quarter.

The consistency of these GDP growth expectations indicates that, while economic expansion remains modest, confidence has not deteriorated despite ongoing structural challenges facing the South African economy.

Conclusion

The marked decline in inflation expectations reflects a meaningful shift in South Africa’s economic outlook, driven largely by the government’s decision to adopt a lower and more focused inflation target. While inflation has not yet fully converged on the new 3 percent benchmark, the broad-based adjustment across businesses, analysts, labour groups and households signals growing confidence in the policy framework and the Reserve Bank’s ability to deliver price stability. If these trends are sustained, they strengthen the case for gradually lower interest rates over the medium term, offering potential relief for borrowers while supporting longer-term investment and economic resilience.