SARB vs US Fed: The case for independent action

This week’s South African Reserve Bank (SARB) meeting is arguably one of the most important in recent history. The significance does not stem from elevated inflation (which is contained), a global recession (which we are not experiencing), or governmental pressure. Rather, its importance lies in the potential for the South African Reserve Bank to signal a clear departure from the trajectory of the United States Federal Reserve (Fed).

The US Fed is the largest, most influential central bank in the world. It governs the interest rate and liquidity policy for the US dollar – the currency in which over 50% of global trade (global export invoicing) is denominated.

The state of the US dollar

For those who are not frequent observers of US monetary policy, a quick recap is in order. Following Covid and the economic recovery in 2021, the US experienced the biggest upside inflation surprise in decades, which was followed by the sharpest rise in interest rates in more than four decades.

Since then, inflation has come down, but while it is lower, it is certainly not quite “under control.” The US has still not hit its 2% target since 2020, and expectations have inflation back up above 3% for most of the rest of the year, not reaching 2% at any point through the end of 2026 (Bloomberg median).

Over the last six months, the expected inflation print in the US for October 2025 is up by 1.2% to 3.7% Year-on-Year, while in South Africa, our number is down 0.5% to 4.5% – a net swing of almost 2%. To put it differently, US inflation saw a disastrous spike, ground its way lower, is still not at the target and is expected to get worse. In SA, we saw higher inflation and brought it under control. That was followed by a series of positive surprises alongside benign forward expectations. There has been a meaningful divergence between the recent experience and outlook of inflation between the USA and South Africa. Up to this point, the South African Reserve Bank has followed the policy actions of the Fed almost in lockstep, but with the changed situation as it stands, we can afford to diverge.

What lies ahead?

It is for this reason that the meeting is important. Our reserve bank has a well-deserved reputation for its capability and prudence – and it is that reputation that may well allow or perhaps even require it to select a different path.

The South African Reserve Bank and the Fed face two fundamentally different outlooks and recent histories. Up to now, the South African Reserve Bank followed the Fed because it was prudent, it protected the Rand, and the differential in outlook was not so clear. Over the last two months, the situation has changed – a rate cut in South Africa is now more than justified, and the lack of a cut may be somewhat questionable.

The future could be decided here

If the SARB cannot justify actions independent of the Fed now, it is difficult to imagine a scenario in the future where it will. This meeting is important as it will shed light on the reaction function of the SARB and the degree to which it is capable of independent actions.

A rate cut this week is certainly justified; from here it looks likely, but we may still not see one – and that may tell us more about the SARB than any meeting in recent history. (One reason why it might not happen is that the SARB may prioritise the stability of the Rand and prefer to not diverge from US policy over the local inflation outlook.  They are also in the process of perhaps lowering the inflation target and a higher real rate will assist with that endeavour.)