Reserve Bank trims interest rate amid global uncertainty and explores lower inflation target

News24

a day ago

The Central Bank reduced the repo rate by 25 basis points amid slowing inflation and a subdued global growth outlook.
Governor Lesetja Kganyago confirmed ongoing work towards potentially lowering the inflation target.
A lower inflation target could lead to lower interest rates over time, potentially benefiting borrowers and supporting economic growth and job creation.
The SA Reserve Bank (SARB) has reduced its policy rate by 25 basis points, effective 30 May, in response to a complex mix of global economic uncertainty, subdued domestic growth, and well-contained inflation.
The decision, announced by Governor Lesetja Kganyago following the monetary policy committee (MPC) meeting on Thursday, reflects both local and international headwinds, as well as a growing policy debate around lowering the inflation target.
Five MPC members supported the 25 basis point cut, while one preferred a more aggressive 50 basis point reduction. The move brings the repo rate down in a context where global interest rates have generally softened, despite volatile financial markets and increased geopolitical risks.
Kganyago noted that global economic conditions had remained volatile since the MPC's previous meeting. The US had introduced higher import tariffs only to partially reverse them, contributing to market fluctuations.
US assets have sold off, while alternative safe havens, such as gold and the euro, have performed well.
Lesetja Kganyago
The Reserve Bank has revised its global growth forecast downwards, citing elevated uncertainty and higher trade barriers. Inflation prospects remain mixed. While tariffs and supply chain disruptions could push inflation up in some economies, other forces such as lower oil prices and subdued global demand could pull inflation down.
The US Federal Reserve has left its rates unchanged, but other central banks, including the Bank of England and European Central Bank, have eased monetary policy.
Domestic growth and inflation outlook
At home, the SARB has lowered its GDP growth projection for this year to 1.2%, expecting a gradual rise to 1.8% by 2027. The first quarter's official growth data is still pending, but indicators from sectors such as mining and manufacturing have been weaker than expected, and unemployment has increased.
Inflation, meanwhile, fell below 3% last month, driven largely by lower fuel costs. Core inflation, which excludes volatile items, was at the bottom end of the bank's target range. The central bank has also revised its inflation forecast downwards, supported by a stronger rand, lower oil prices and the cancellation of a previously expected VAT increase.
Despite this benign inflation environment, the MPC assessed risks as balanced, citing possible currency volatility due to both global and local developments. The rand briefly touched multi-year lows against the US dollar last month but has since stabilised.
Inflation target review underway
In addition to the rate decision, Kganyago addressed ongoing work to review the country's inflation targeting framework. He said the Reserve Bank, together with the National Treasury, was considering whether SA should adopt a lower inflation target, possibly 3%, down from the current 3% to 6% band.
'Much of the heavy technical work has been done,' said Kganyago. 'We've benchmarked against both advanced and emerging economies. Many countries have revised their targets lower over time.'
We are now assessing the transition, how to move from one target to another, over what period, and what support would be needed from other areas of economic policy.
Lesetja Kganyago
Kganyago cited international trends, noting that advanced economies typically target 2%, while the median inflation target among emerging markets is around 3%. He said that interest rates in countries with lower inflation targets are also generally lower.
Responding to questions from journalists, Kganyago rejected the notion that lower inflation targets necessarily imply higher interest rates.
'That argument just baffles me,' he said. 'Countries with 2% inflation targets often have lower rates than we do.'
If adopted, a lower inflation target could result in structurally lower interest rates over time, which would benefit borrowers. According to the SARB's modelling, in a 3% inflation scenario, the policy rate would fall to just under 6%, compared to remaining above 7% under the current framework.
'We would be a low inflation, low interest rate country,' Kganyago said.
However, the governor acknowledged that the transition would require coordination beyond monetary policy. Administered price setters, for example, may need to adjust their pricing behaviour in line with a lower inflation environment.
A move to lower inflation targeting could also support longer-term growth and job creation.
'You end up with higher growth over the forecast horizon,' said Kganyago. 'A growing economy should also create jobs.'