South African Reserve Bank on Repo Rate
By Lerato Mpembe
The South African Reserve Bank (SARB) has announced a 25 basis point reduction in the repo rate, effective from 30 May 2025. This decision, made public at 09:02 PM SAST on Thursday, 29 May 2025, lowers the prime lending rate offered by banks to 10.75%. The Monetary Policy Committee (MPC) saw five of its members support the 25 basis point cut, while one advocated for a more substantial reduction of 50 basis points.
Inflation Forecast Revised Downward
SARB Governor Lesetja Kganyago, delivering the MPC statement, noted an improved inflation outlook. “Looking forward, we have revised down our inflation forecasts,” he said. This adjustment stems from several factors: a lower starting point for inflation, a stronger exchange rate assumption, and declining world oil prices. These elements have mitigated the upward pressure on fuel costs caused by the higher fuel levy introduced in the Budget. Additionally, earlier projections accounted for VAT increases that have since been scrapped.
In April, inflation dropped below 3%, with core inflation also registering at 3%, aligning with the lower boundary of the SARB’s target range. Kganyago described this as “a chance to lock in lower inflation at low cost,” highlighting the opportunity presented by the current economic conditions.
Risks of Global Uncertainty
Despite the positive inflation outlook, the MPC evaluated potential risks. Kganyago outlined an adverse scenario where escalating global trade tensions could trigger a worldwide economic slowdown, leading to a sharp depreciation of the rand. “This scenario showed how a country with some fundamental vulnerabilities, like South Africa, risks stagflation,” he explained. Stagflation—marked by stagnant growth and rising inflation due to a weaker currency—could necessitate tighter monetary policy to stabilise the economy.
The rand recently hit a multi-year low against the US dollar but has since rebounded. “Conditions seem more settled than they did in March, even if the global environment remains uncertain,” Kganyago remarked, reflecting cautious optimism.
GDP Growth Projections Adjusted
The SARB also revised its Gross Domestic Product (GDP) growth forecasts downward. Economic growth is now projected at 1.2% for 2025, with an expected increase to 1.8% by 2027. Kganyago underscored the challenging global economic climate, stating, “Domestic reform is critical for achieving healthy growth.” He proposed several measures to bolster the economy, including:
• Achieving a sustainable public debt level,
• Repairing and strengthening network industries,
• Reducing administered price inflation, and
• Aligning real wage growth with productivity improvements.
SARB’s Role in Economic Stability
Kganyago reiterated the SARB’s primary mandate: ensuring price stability. “We see scope to lock in low inflation and clear the way for sustainably lower interest rates,” he said. This repo rate cut reflects a strategic move to capitalise on the improved inflation outlook while supporting economic growth cautiously.
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