South African central bank cuts rates and doubles down on lower inflation target

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South African central bank cuts rates and doubles down on lower inflation target

9:38 CAT | 30 May 2025

File photo: Reuters

Economists had predicted close call

But all MPC members favoured easing policy

Bank lays out impact of lower inflation target

Stresses preference for 3% objective not 4.5%

South Africa’s central bank was unexpectedly decisive in cutting interest rates on Thursday, with all members of its Monetary Policy Committee backing a cut as they doubled down on their preference for a lower inflation target.

The South African Reserve Bank (SARB) cut its repo rate by 25 basis points (bps) to 7.25%, lowering its inflation and economic growth forecasts for this year and next.

Five Monetary Policy Committee members wanted the 25 bps cut while one favoured a larger 50 bps cut.

Economists polled by Reuters had predicted a close call, with a significant minority thinking that the typically cautious MPC might hold the policy rate.

But since the bank’s last policy meeting in March, inflation has stayed below its 3% to 6% target range and disputes in the ruling coalition over the national budget have been mostly resolved.

The SARB still stressed that U.S. President Donald Trump’s trade war and elevated uncertainty were likely to weaken the world economy, but the tone was less hawkish than in March when the rate was left unchanged.

It lowered its 2025 economic growth forecast to 1.2% from 1.7%, while revising down this year’s inflation forecast to 3.2% from 3.6% to reflect a stronger rand assumption and lower global oil prices.

Despite a more upbeat domestic picture, the global backdrop remains unpredictable.

President Cyril Ramaphosa met Trump in Washington last week, trying to secure tariff exemptions and improve relations after Trump’s repeated criticism of South Africa.

But there was no immediate breakthrough on the trip.

The two countries’ trade teams are still discussing proposals ranging from South Africa importing U.S. natural gas to a duty-free quota of vehicles South Africa could export to the U.S. each year.

The SARB on Thursday released detailed modelling of a lower inflation target of 3%, which it said its MPC found more attractive than the 4.5% level it currently aims for.

The modelling showed growth would be slower initially because real rates would be higher, but the economy would do better later as rates ease further.

The finance minister would need to sign off on changing the bank’s inflation target, but discussions are at an advanced stage, Governor Lesetja Kganyago said.

This meeting will only entrench expectations that a lower inflation target will soon be adopted,” said Razia Khan, chief economist for Africa and Middle East at Standard Chartered.

Source: Reuters