SARB cuts rates, targets 3% inflation – markets hesitant

The Monetary Policy Committee (MPC) unanimously cut rates by 25 basis points (bps) to 7.0% in its latest decision, aligning with market and analyst expectations. This development comes as inflation remained under control, with five-year inflation expectations dropping to 4.4%, marking the first instance of long-term inflation expectations falling below the midpoint of 4.5% since the BER survey began.

Transition to 3.0% inflation target

In a significant shift, the South African Reserve Bank (SARB) announced its focus on targeting a 3.0% inflation rate. This new inflation target represents the lower end of the existing 3.0%–6.0% band. According to the MPC, this mirrors the SARB’s 2017 shift to explicitly target 4.5%. The Quarterly Projection Model (QPM) now aligns with the 3.0% target without any consensus yet with the National Treasury over officially amending the target band.

Although officially, the target band remains, GDP impacts appear minimal, with 2026 growth revisions down by 20bps (1.3%) but an upward revision of 20bps (to 2.0%) projected for 2027.

Inflation and interest rate adjustments

The updated QPM reduced inflation forecasts significantly:

• 2026 forecast revised to 3.1% (from 4.2%)
• 2027 forecast revised to 3.0% (from 4.4%)

These projections fall below independent estimates, which foresee inflation levels of 3.8% in the second half of 2025 and 4.1% in 2026. The SARB acknowledged external risks to their forecasts, stemming from global market volatility, US rates, and tariff expectations.

Lower inflation supports reduced interest rates, with the repo rate projected to drop to 5.8% in 2027 under the 3.0% targeting framework. However, achieving this without rand depreciation may prove challenging, especially if the Federal Reserve maintains higher US rates for longer.

Constitutional mandate and implications

The SARB reiterated its mandate under Section 224 of the constitution to “protect the value of the currency in the interest of balanced and sustainable economic growth.” This gives them authority to act independently, targeting 3.0% to sustain price stability. Despite these changes, the SARB avoided definitively stating South Africa now operates at a 3.0% point target. They clarified that the focus from September 2025 will shift to 3.0% within the band.

Market reactions to SARB inflation targeting

Following the MPC meeting:

• Yields on government bonds maturing in 2035 dropped 20bps to 9.62%.
• The rand remained stable at around 18.00 to the US dollar.
• Interest rate derivatives indicated a balanced expectation of future rate cuts, with a 25bps cut fully priced within a year.

In summary, while the SARB’s 3.0% inflation target highlights a stricter focus on price stability, aligning with global best practices, Matrix Fund Managers believes market sentiment will take time to adapt, particularly regarding the repo rate’s trajectory.