South Africa’s Economic Outlook Shifts as Inflation Eases and Rate Cuts Loom

South Africa has already implemented cumulative interest rate reductions totalling 1.50 percentage points since September 2024. As a result of these adjustments, the prime lending rate currently stands at 10.5%, reflecting a meaningful shift away from the tighter monetary conditions that previously prevailed.

Key Takeaways

• Inflation Is Easing: CPI trends show inflation stabilising near the lower end of the target range, giving the Reserve Bank more room to support the economy.
• More Rate Cuts Are Likely: With rates already lower, economists expect further cuts in 2026, improving borrowing conditions for households and businesses.
• Food Prices and the Rand Matter: Short-term food costs and currency movements remain key factors that could influence inflation and future rate decisions.

Inflation Trends Point to Further Policy Flexibility

South Africa’s inflation outlook is increasingly showing signs of moderation, which is creating additional scope for further interest rate reductions during the course of 2026. Recent data and projections suggest that price pressures are easing at a pace that may support a more accommodative monetary stance.

December’s consumer price index is expected to have shown no change on a month-on-month basis, while annual inflation is projected to have edged slightly lower to 3.4%, compared with 3.5% previously. This assessment was outlined by Investec economist Lara Hodes, who indicated that overall price growth continues to trend within a more benign range.

Fuel costs provided limited upward pressure during the month, with petrol prices increasing by only 29 cents per litre. Hodes also referenced commentary from Agbiz, which expects food inflation to remain on a moderating trajectory. This outlook is underpinned by expectations of relatively ample agricultural supplies, which should help to contain further price increases in the food basket.

Reserve Bank Signals Confidence in Medium-Term Inflation Path

In November, South African Reserve Bank Governor Lesetja Kganyago acknowledged that inflation picked up in October, exceeding the average rate of 3% recorded during the first half of the year. However, this acceleration was largely attributed to non-core components, including meat, vegetables and fuel, rather than broad-based price pressures across the economy.

The governor indicated that these sources of inflationary pressure were viewed as temporary in nature. From the beginning of the new year, inflation is expected to resume its downward trend as these factors dissipate and underlying conditions stabilise.

Kganyago further noted that a combination of downward inflationary forces, alongside occasional upside surprises, had been taken into account by the central bank. A lower assumed oil price also contributed to the Reserve Bank’s assessment that South Africa remains on course to achieve an inflation rate of 3% over the medium term.

Nedbank has echoed this broadly constructive view, describing underlying inflation as subdued and relatively stable. The bank expects headline inflation to have closed at around 3.2% last year, before edging higher to approximately 3.5% in 2026.

Economists See Room for More Rate Cuts

Economists have indicated that these conditions leave the South African Reserve Bank well positioned to continue easing monetary policy. Johann Els, chief economist at PSG Financial Services, has suggested that the central bank is likely to remain in a position to cut rates further. He anticipates two additional interest rate reductions during the first half of 2026.

Els also expects inflation to stabilise at around 3.2% in 2025, before rising modestly to approximately 3.6% thereafter.

Annabel Bishop, chief economist at Investec, has highlighted that financial markets are currently fully pricing in only one 0.25 percentage point reduction in the repo rate, expected in March. A second cut of the same magnitude, potentially occurring in September, is only partially reflected in market expectations.

Impact on Borrowers and Government Finances

South Africa’s earlier rate cuts since September 2024 have already lowered borrowing costs meaningfully, bringing the prime lending rate down to its current level of 10.5%. This evolving environment suggests that expectations around interest rates, inflation and broader economic conditions are becoming increasingly aligned with a more supportive growth outlook.

Conclusion

South Africa’s economic outlook is gradually improving as inflation pressures ease and interest rates move lower, creating a more supportive environment for growth. While short-term risks remain, particularly around food prices and currency movements, the broader trend points to greater stability and increased policy flexibility. If inflation continues to behave as expected, further interest rate cuts in 2026 could help stimulate consumption, investment and confidence, reinforcing a cautiously optimistic trajectory for the economy.