Pretoria: The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has decided to reduce the repo rate by 25 basis points, with effect from 30 May. This adjustment lowers the prime lending rate from banks to 10.75%.
According to South African Government News Agency, five members of the MPC supported this decision, while one member preferred a more significant cut of 50 basis points. SARB Governor Lesetja Kganyago, while delivering the Monetary Policy Committee statement, mentioned that the inflation forecasts have been revised down. This revision is due to a lower starting point, a stronger exchange rate assumption, and lower world oil prices. These factors have offset the pressure on fuel costs from the higher fuel levy announced in the Budget. The previous forecast, which included VAT increases, has since been canceled.
In April, inflation fell below 3%, primarily due to falling fuel costs, although underlying inflation remains contained. Core inflation was reported at 3%, at the bottom of SARB’s target range. Kganyago highlighted the opportunity presented by the slowed inflation to lock in lower inflation at low cost.
Despite a benign inflation outlook, the MPC considered an adverse scenario involving a global slowdown triggered by escalating trade tensions, which could lead to a sharp depreciation of the rand. This scenario indicates potential risks of stagflation, with lower growth and rising inflation due to currency weakness. In such conditions, monetary policy would need to tighten to stabilize the macroeconomy. The rand’s brief depreciation to a multi-year low against the US dollar last month was noted, although it has since recovered.
The Gross Domestic Product (GDP) projections have been trimmed, with growth currently expected at 1.2% this year, rising to 1.8% by 2027. Kganyago emphasized the importance of domestic reform for achieving healthy growth, noting that the SARB’s main contribution is to deliver price stability. This would help lock in low inflation and pave the way for sustainably lower interest rates. Additional measures for improving economic conditions include reaching a prudent public debt level, repairing and strengthening network industries, lowering administered price inflation, and aligning real wage growth with productivity gains.