South Africa cut key lending rate, set 3% new inflation target

By: Chidozie Nwali

The South African Reserve Bank (SARB) has ushered in a new era of monetary policy, cutting its key lending rate and simultaneously cementing a lower, more ambitious inflation target.

On Thursday, the SARB’s Monetary Policy Committee (MPC) announced a 25-basis-point (bps) reduction to the Repo Rate, bringing it down from 7.00% to 6.75%. This adjustment automatically lowers the commercial Prime Lending Rate to 10.25%.

Last week Finance Minister Enoch Godongwana formally announced a historic change to the country’s inflation target, announcing a 3% point target with a 1-percentage-point tolerance band, meaning the effective target range is 2% to 4%.

A change from the over 25 years old range of 3% to 6%, with the SARB informally targeting the midpoint of 4.5%.

Minister Godongwana, delivering the Medium-Term Budget Policy Statement on Wednesday, confirmed that the new target was agreed upon with SARB Governor Lesetja Kganyago and supported by the President and Cabinet. The new goal immediately replaces the previous 25-year-old range and is expected to be implemented over the next two years.

Governor Kganyago and the SARB had long advocated for a lower target, arguing that tighter price expectations are crucial for lowering the cost of living and borrowing, which in turn supports higher long-term economic growth and job creation.

The MPC’s decision to ease policy was unanimous, reflecting growing confidence in the inflation outlook, despite a recent uptick in consumer prices.

“Members agreed there was scope now to make the policy stance less restrictive, in the context of an improved inflation outlook,” Governor Kganyago told a news conference.

While annual headline inflation rose slightly to 3.6% in October (up from 3.4% in September), it remains within the new 2% to 4% target band. Governor Kganyago stated that the MPC views the recent acceleration as largely due to temporary non-core items like meat, vegetables, and fuel, with inflation expected to head lower again in 2026.

The SARB’s Quarterly Projection Model showed a small downward revision to the inflation outlook for both 2025 and 2026, largely due to a stronger rand and lower assumptions for the oil price.

The rate cut provides immediate financial relief, particularly for the property market, where homeowners with variable-rate mortgages will see a slight reduction in their monthly repayments.

South African retail trade sales showed a notable acceleration in September, rising by 3.1% year-on-year (yoy)

For the third quarter of the year (July to September), retail trade sales grew by a modest 2.0% compared to the same period in the previous year.

The latest rate cut is seen as a supportive measure for economic growth, which has been sluggish. The South African National Treasury forecasts real GDP growth of 1.2% for 2025.