SARB Maintains 7% Rate as Central Bank Pursues Lower Inflation Target Amid Economic Uncertainty

The South African Reserve Bank’s Monetary Policy Committee made the strategic decision to hold the policy rate unchanged at 7% on Thursday, marking a pause in the central bank’s easing cycle that began in September 2024. The decision revealed a split within the committee, with four members favoring the status quo while two advocated for a 25 basis point reduction, highlighting the delicate balance facing policymakers as they navigate between supporting economic growth and establishing a more ambitious inflation framework.

Governor Lesetja Kganyago emphasized the central bank’s evolving approach to monetary policy, stating: “Since September last year, we have reduced rates by 125 basis points, and we want to see how this is affecting the economy, how expectations evolve, and how inflation risks are resolved.” This cautious stance reflects the SARB’s commitment to assessing the cumulative impact of previous rate cuts while positioning the economy for a transition to lower long-term inflation expectations.

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Pivotal Shift Toward 3% Inflation Target

The most significant aspect of Thursday’s announcement was the SARB’s explicit commitment to targeting inflation at the bottom of its 3-6% target range, rather than the previous 4.5% midpoint. This strategic pivot represents a fundamental shift in South Africa’s monetary policy framework, with profound implications for long-term interest rate expectations and economic planning.

“The MPC emphasises that stabilising inflation at 3%, rather than 4.5%, implies a lower longer-term level for the policy rate,” Kganyago explained during the announcement. The governor noted that inflation expectations play a crucial role in shaping this transition, adding: “In our economic modeling, inflation expectations are seen as crucial in guiding the economy toward the SARB’s preferred 3% inflation target.”

This ambitious recalibration aligns with international analysis that has consistently shown South Africa’s traditional 3-6% target range is both too high and too wide compared to global best practices. The shift toward a 3% anchor reflects the central bank’s confidence in achieving sustainably lower inflation while creating space for more accommodative monetary policy over the medium term.

Economic Context: Growth Challenges and Inflation Dynamics

The interest rate decision comes as South Africa’s economy continues to grapple with persistent structural challenges despite recent improvements in key metrics. Economic growth remains modest, with the SARB’s latest projections pointing to GDP expansion of 1.2% in 2025, up from earlier estimates of 0.9% but still well below levels needed to address the country’s unemployment crisis.

The unemployment situation remains one of the most pressing challenges facing policymakers. South Africa’s official unemployment rate reached 33.2% in the second quarter of 2025, representing 8.2 million unemployed individuals out of a labor force of 25 million. Even more concerning is the expanded unemployment rate, which includes discouraged work-seekers, standing at an alarming 43.1%.

Youth unemployment presents a particularly acute crisis, with the rate among those aged 15-24 reaching 62.4% in the first quarter of 2025. This represents a massive waste of human potential and poses significant risks to long-term social stability and economic development.

Inflation Outlook and Risk Assessment

The SARB’s inflation projections have been revised upward since the previous meeting, reflecting emerging pressures in key sectors. The central bank now expects headline inflation to average 3.4% in 2025 and 3.6% in 2026 before returning to the 3% target by 2027.

Food and electricity prices represent the most significant upside risks to the inflation outlook. The SARB’s latest forecast incorporates higher electricity price inflation of nearly 8%, up from previous estimates of 6%, following the National Energy Regulator’s recent pricing corrections. These administered price increases, combined with ongoing supply chain challenges, create persistent upward pressure on the consumer price index.

Despite these near-term pressures, underlying inflation dynamics remain relatively benign. Core inflation has moderated to around 3%, reflecting weak domestic demand and muted wage pressures across most sectors of the economy. This underlying softness provides the foundation for the SARB’s confidence in achieving its ambitious 3% inflation target over the medium term.

Government of National Unity and Policy Framework

The monetary policy decision unfolds against the backdrop of South Africa’s Government of National Unity, formed in June 2024 following elections that saw the African National Congress lose its parliamentary majority for the first time since 1994. The GNU, led by President Cyril Ramaphosa and comprising 11 political parties, has committed to addressing the country’s structural economic challenges through coordinated policy reforms.

The GNU’s economic priorities align closely with the SARB’s inflation targeting objectives, focusing on “rapid, inclusive and sustainable economic growth, the promotion of fixed capital investment and industrialization, job creation, transformation, livelihood support, land reform, infrastructure development, structural reforms and transformational change.”

However, the coalition faces significant challenges in implementing its ambitious agenda. Political tensions within the GNU, particularly between the ANC and the Democratic Alliance, have created uncertainty about the government’s ability to deliver on key reforms. The World Bank notes that while the GNU offers “an historic opportunity to build on [South Africa’s] strengths and pursue ambitious reforms,” it also faces “massive long-standing challenges: eroding standards of living, unacceptably high levels of unemployment, poverty, and inequality.”

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Structural Reforms and Economic Transformation

The SARB’s monetary policy operates within a broader context of structural reforms designed to address South Africa’s long-standing economic constraints. The Operation Vulindlela initiative, launched in 2020, has made significant progress in addressing key sectoral bottlenecks, particularly in electricity and logistics.

Electricity sector reforms have yielded notable improvements, with South Africa experiencing no planned power outages (load shedding) since March 2024. This achievement represents a crucial step forward, as electricity supply shortages had been a binding constraint on economic growth for over a decade. The opening of the electricity market to private power generation has encouraged investment and improved system reliability.

Transport and logistics reforms are also underway, with efforts to separate freight rail operations and infrastructure while developing frameworks for private sector participation. These improvements are essential for enhancing South Africa’s export capacity and reducing the costs of doing business.

Global Context and Federal Reserve Impact

The SARB’s decision to pause its easing cycle contrasts with the recent actions of other major central banks. The U.S. Federal Reserve cut rates by 25 basis points on Wednesday, marking its first reduction of 2025, while several other developed market central banks have also implemented accommodative policies.

However, South Africa’s unique economic circumstances, including persistent inflation risks and currency vulnerabilities, require a more cautious approach. The SARB must balance the desire to support economic growth through lower rates with the need to maintain credibility in its inflation targeting framework and preserve the stability of the rand.

The interest rate differential between South Africa and developed markets remains crucial for attracting foreign investment and maintaining exchange rate stability. Analysis suggests that while Fed easing creates space for SARB cuts, the central bank is unlikely to reduce rates too aggressively and narrow the differential significantly.

Market Reactions and Forward Guidance

Financial markets had largely priced in the SARB’s decision to hold rates steady, with Forward Rate Agreement curves indicating expectations for gradual easing over the remainder of 2025. The market consensus suggests a 25 basis point cut could materialize either in November or early 2026, depending on inflation developments and global economic conditions.

South African government bond yields have been volatile throughout 2025, reflecting various domestic and international uncertainties. The yield on 10-year rand-denominated bonds reached a high of 10.99% in April amid political disputes over the national budget and trade tensions, before moderating to around 10.13% by June as these concerns eased.

The rand’s exchange rate remains sensitive to both domestic political developments and global risk sentiment. The currency has been particularly affected by uncertainty surrounding U.S. trade policies and their potential impact on South African exports, particularly given the country’s reliance on commodity markets.

Banking Sector and Credit Conditions

The pause in rate cuts will affect South Africa’s banking sector, which has been adjusting to the changing interest rate environment following the previous 125 basis points of easing. Commercial banks’ prime lending rate remains at 10.5%, maintaining pressure on borrowing costs for consumers and businesses.

Credit extension data suggest some improvement in lending conditions, with positive cyclical indicators emerging despite the challenging economic environment. However, achieving a more robust growth trajectory will require substantially higher investment levels than currently observed, highlighting the importance of continued structural reforms alongside monetary policy accommodation.

The banking sector’s health remains crucial for transmitting monetary policy effectively to the broader economy. South Africa’s well-developed financial system provides strong transmission mechanisms, but the effectiveness of rate cuts depends on banks’ willingness and ability to pass through policy changes to their customers.

Future Monetary Policy Trajectory

Looking ahead, the SARB’s policy path will be heavily influenced by the evolution of inflation expectations and the success of structural reforms in boosting economic growth. The central bank has emphasized that future decisions will be taken on a “meeting-by-meeting basis, with careful attention to the outlook, data outcomes, and the balance of risks to the forecast.”

The transition to a 3% inflation target represents a multi-year process that will require careful calibration of monetary policy settings. Kganyago noted that the central bank considered scenarios where expectations adjust more slowly than anticipated, treating them “as more backward looking, with less attention paid to the SARB’s communication.”

Economic projections suggest that the SARB will need to maintain a delicate balance between supporting growth and anchoring inflation expectations at the lower target level. The success of this strategy will depend not only on monetary policy but also on the government’s ability to deliver on structural reforms and address the underlying constraints on economic growth.

Challenges and Opportunities Ahead

The SARB’s decision reflects the complex challenges facing South African policymakers as they attempt to foster economic growth while maintaining price stability. The shift to a 3% inflation target represents an ambitious but necessary step toward creating a more stable macroeconomic environment that can support sustained growth and job creation.

However, achieving this objective will require coordinated efforts across multiple policy domains. Fiscal consolidation remains essential to reduce government debt levels and create space for counter-cyclical policy when needed. The IMF estimates that South Africa’s public debt-to-GDP ratio needs to be brought down from current levels to ensure long-term fiscal sustainability.

Structural reforms in areas such as education, labor markets, and regulatory frameworks are equally important for boosting productivity and creating employment opportunities. Recent IMF analysis suggests that reforms addressing business regulation, governance, and labor market gaps could increase medium-run output by 9% and significantly boost employment levels.

Conclusion: Navigating Toward Sustainable Growth

The SARB’s decision to maintain the repo rate at 7% while pivoting toward a 3% inflation target represents a calibrated response to South Africa’s complex economic challenges. The split vote within the MPC reflects legitimate differences of opinion about the appropriate policy stance, underscoring the difficulty of navigating between competing objectives of growth support and price stability.

The success of this new monetary policy framework will ultimately depend on the broader economic transformation underway in South Africa. The GNU’s ability to implement structural reforms, address infrastructure constraints, and create conditions for increased investment will be crucial for achieving the sustained growth needed to reduce unemployment and inequality.

As South Africa enters what many observers describe as a critical period for its economic trajectory, the SARB’s commitment to lower long-term inflation provides an important anchor for expectations while creating space for future policy accommodation. The central bank’s pause in the easing cycle reflects prudent risk management while maintaining flexibility to respond to changing economic conditions.

The coming months will be crucial for determining whether South Africa can break out of its low-growth equilibrium and create the conditions for more inclusive and sustainable development. The SARB’s monetary policy will play a supporting role in this transformation, but success will ultimately require coordinated efforts across all areas of economic policy and governance.

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By: Montel Kamau

Serrari Financial Analyst

19th September, 2025