The South African Reserve Bank Monetary Policy Committee is scheduled to convene next week for its first policy-setting meeting of 2026, where it will decide on the country’s next interest rate move. Most economic forecasts currently anticipate at least a further 50 basis points of interest rate cuts during 2026, with an additional 25 basis points likely to follow in 2027 as inflation pressures continue to moderate.
Key Takeaways
- Policy Pause Was the Base Case: Analysts initially expected the Reserve Bank to keep interest rates unchanged after the November cut in order to assess how earlier easing would affect the economy.
- Gradual Cuts Were Anticipated for 2026: The projected path pointed to a measured easing cycle, with a cut in March, a pause in May and a further reduction later in the year.
- Rate Changes Work With Long Delays: Interest rate adjustments typically take 12 to 18 months to meaningfully influence household spending and business investment, reinforcing the case for caution.
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Expected Policy Pause Followed by a Gradual Easing Cycle
After the Reserve Bank implemented a 25-basis-point reduction at its final meeting in November 2025, the prevailing view among analysts was that policymakers would pause to evaluate the cumulative impact of the easing already delivered.
Under this expected path, the January 2026 meeting would result in rates being left unchanged, followed by a cut in March, another pause in May and a final reduction in July later in the year.
Interest rate changes typically take between 12 and 18 months to fully filter through to household spending and business investment.
Currency Strength Reopens the Debate
However, developments in the currency market have prompted some commentators to reconsider this timetable, particularly after the rand posted a strong start to the year against the US dollar.
In the opening weeks of the year, the rand strengthened towards R16.30 to the dollar, improving South Africa’s external position and easing imported inflation pressures.
A stronger rand reduces the cost of imports such as fuel and food, which can help lower inflation without any direct policy intervention.
This currency performance has led some market participants to argue that the case for an earlier interest rate cut has strengthened.
Aluma Capital’s chief economist, Frederick Mitchell, has pointed to the combination of a firmer rand, elevated commodity prices and relatively stable inflation as factors that create room for the Monetary Policy Committee to consider further easing as early as January.
In addition, a number of economists and academic commentators have suggested that interest rates have remained in restrictive territory for an extended period, with the November reduction only beginning to reverse that stance.
“Restrictive” rates are generally understood to be above the economy’s neutral or steady-state level, where growth is neither stimulated nor restrained.
From this perspective, a faster pace of rate cuts could provide meaningful support to economic growth at a time when domestic demand remains subdued.
SARB Caution Remains a Key Constraint
Despite these arguments, any move towards quicker easing would require careful judgement from the Reserve Bank, which has historically maintained a cautious and conservative approach to monetary policy.
This caution is reinforced by ongoing volatility in global trade and financial markets, where shifts in sentiment and policy can occur rapidly and with little warning.
Another critical consideration for policymakers is the commitment to guiding inflation towards the newly adopted 3 percent target, a process that is expected to take approximately two years to fully achieve.
It is this emphasis on stability and credibility that has led other economists to conclude that the Reserve Bank is more likely to keep rates unchanged at the upcoming meeting and proceed with gradual adjustments thereafter.
Investec’s chief economist, Annabel Bishop, has highlighted that the central bank continues to favour a tight policy stance when easing conditions, prioritising the suppression of inflationary pressures.
From a medium-term perspective, the Monetary Policy Committee remains focused on anchoring inflation firmly at the new 3 percent year-on-year target, rather than responding aggressively to short-term market movements.
The Reserve Bank has also repeatedly signalled that the prevailing global environment is highly uncertain, reinforcing the need for a measured and cautious approach to interest rate decisions.
Beyond the January Meeting
Looking past next week’s decision, Bishop expects the Reserve Bank to leave rates unchanged in January, followed by two 25-basis-point reductions later in the year.
Under this scenario, the first cut would take place in the second quarter, most likely in March, with another reduction expected in the third quarter, potentially in July.
As inflation moves closer to the 3 percent target, additional interest rate cuts are likely to become more feasible over the medium term.
According to the Reserve Bank’s quarterly projection model, the repo rate is forecast to decline to around 5.75 percent in the outer years of the forecast horizon, which extends to the end of 2028.
The quarterly projection model is a forecasting guide and not a commitment to a specific interest rate path.
The model also suggests a steady-state repo rate of approximately 5.50 percent, implying a significant easing from current levels over time.
From the present repo rate of 6.75 percent, this trajectory indicates a further 125 basis points of interest rate reductions, with this level potentially being reached around 2029.
Long-term interest rate expectations influence bond markets, pension funds and large infrastructure investment decisions.
However, the pace and extent of these cuts will depend heavily on the evolution of inflation and the broader economic environment, including South Africa’s ability to maintain progress towards the 3 percent inflation target.
In the near term, the next adjustment to the repo rate is still expected to occur in March, when consumer price inflation is projected to fall to around 3.0 percent year on year in February.
The Reserve Bank’s upcoming Monetary Policy Committee meeting will take place next week, with the interest rate decision scheduled to be announced on 29 January.
Conclusion
The expected policy path reflects a cautious and deliberate approach by the Reserve Bank, balancing the need to support economic growth with the reality that interest rate changes take time to influence real economic activity. By allowing earlier cuts to work through the system before making further adjustments, policymakers aim to avoid moving too quickly in an uncertain environment, while still laying the groundwork for a gradual easing cycle as inflation pressures continue to moderate.
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