Post MPC review: SARB slashes rate and inflation expectation

Kim Silberman

The Monetary Policy Committee (MPC) cut rates by 25bps to 7.0% in a unanimous decision, as expected by both the market and analysts. Room to cut rates was made available by inflation remaining well contained and, importantly, by 5-year inflation expectations falling to 4.4%. This is the first time that long-term inflation expectations have fallen below the 4.5% midpoint of the target band since the BER survey began.

More important was the announcement that the South African Reserve Bank (SARB) will now focus on targeting 3.0% inflation, which is the bottom end of the existing range of 3.0% - 6.0%. According to the MPC, this decision is procedurally equivalent to when the SARB announced in 2017 that it would explicitly target 4.5%. The governor confirmed that, as yet, no agreement has been reached with the National Treasury on changing the inflation target. Consequently, while the target band is still officially in place, the Quarterly Projection Model (QPM) will now use 3.0% as its target, as opposed to 4.5%. The sacrifice to growth is estimated to be minimal: GDP growth is lower by 20 basis points (bps) in 2026, having been revised from 1.5% to 1.3%. GDP is actually higher in 2027 by 20bps, revised to 2.0%.

The new QPM lowers the inflation forecast significantly to 3.1% in 2026 and 3.0% in 2027 from 4.2% and 4.4% in the May meeting. Their new forecasts are also below our in-house expectations of 3.8% in the second half of 2025 and 4.1% in 2026. The SARB expects risks to their forecast to emanate primarily from developed markets. Uncertainty about US rates and inflation, the dollar, the oil price, and ever-changing tariff expectations make forecasts difficult. Higher tariffs could cause more disruption to the global economy.

According to the SARB, lower inflation allows for lower interest rates due to the nature of the QPM. Targeting 4.5% results in the repo rate troughing at 7.0%, while targeting 3.0% takes rates 120bps lower, to 5.8% in 2027. Admittedly, they do have real rates temporarily higher in the 3% scenario.

We think it will be difficult for the SARB to cut rates by an additional 120bps and simultaneously generate rand appreciation – which is what their model supposes, especially in a world where the Fed is likely to keep rates on hold for longer. Additionally, from our reading of the post-MPC discussion, inflation is expected to fall to 3.0% purely as a result of changing the target, i.e., there have been no announced changes to the inflation model assumptions other than that the target has changed.

The announcement raises questions around where the mandate for inflation targeting sits. It was clarified by the governor that it sits in Section 224 of the constitution, which states that “the SARB must protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic. Furthermore, the SARB is mandated to perform its functions independently and impartially.” This gives the SARB the mandate to do what it deems necessary to protect the exchange rate and ensure price stability. In this context, the governor highlighted that research shows that inflation at 3.0% maintains price stability.

The SARB was careful to avoid stating that South Africa now has a point target of 3.0%, preferring to articulate that as of September 2025, there will be a change in focus from 4.5% to 3.0%, within the existing band.

In response to the MPC meeting, the yield on government bonds maturing in 2035 fell 20bps to 9.62%, while the rand remained relatively stable at around 18.00 to the US dollar. Interest rate derivatives have reduced by about 10bps, implying that market expectations of the repo rate over the remainder of 2025 are evenly balanced in favour of one more cut. Markets are starting to fully price for a 25bps cut in 12 months. The market may still be digesting the news, and it appears that rate expectations are not adjusting to the significant changes in QPM expectations.