Reserve Bank governor Lesetja Kganyago
The South African Reserve Bank has kept the benchmark repurchase rate at 7% in a widely expected decision as risks to growth forecasts and inflation outlooks are assessed as balanced, governor Lesetja Kganyago announced on Thursday.
The decision was not unanimous; four members preferred to keep rates on hold, while two favoured a 25 basis point cut.
The prime interest rate — the rate at which commercial banks lend to customers will also be maintained at 10.50%.
“Since September last year, we have reduced rates by 125 basis points, and we want to see how this is affecting the economy, how expectations evolve, and how inflation risks are resolved,” Kganyago said.
The Reserve Bank marked up its growth forecast for the year to 1.2% from 0.9%, despite a weaker export outlook, given higher tariffs, the governor said.
South Africa’s economy expanded by 0.8% — higher than expected — during the second quarter, helped by increased economic activity in the mining, manufacturing, trade and agricultural sectors, Statistics South Africa said.
While the Reserve Bank welcomed the strong GDP, Kganyago said it does not want to “overstate the importance of one good quarter”.
“We continue to see modest output gains over the next few years, helped by structural reforms,” he said.
“There are also some cyclical indicators, such as credit extension, which look positive. However, reaching a healthy growth rate will require much higher investment levels than we are achieving now.”
The risks to the growth forecast were therefore assessed as balanced, said Kganyago.
August’s inflation also eased to 3.3% from 3.5% in the previous month, offset by decreases in goods and services, but is still expected to rise in the coming months.
“We anticipate that headline inflation will rise over the next few months, peaking at around 4%,” said Kganyago.
“Our forecast now incorporates higher electricity price inflation, of nearly 8% rather than 6%, given the recent pricing correction by the National Energy Regulator of South Africa.”
“This is a reminder of the serious dysfunction in administered prices, which undermines purchasing power and weakens growth. The solution to this crisis is not a higher level of inflation, but rather sector-specific reforms to improve efficiency,” he said.
“Our inflation projections also have upward adjustments to food and services prices, partly offset by a stronger exchange rate assumption. Overall, we expect headline inflation to average 3.4% this year, and 3.6% next year, before reverting to 3% during 2027.”
The forecast, however, has rates easing gradually as inflation returns to the bottom end of the 3-6% target range, Kganyago said, adding that stabilising inflation at 3%, rather than 4.5%, implies a lower longer-term level for the policy rate.
The announcement comes a day after the United States Federal Reserve delivered a 25-basis point rate cut, and cautiously signalled that further easing could be appropriate.
Kganyago said the global economy appears resilient as growth is holding up and market volatility has subsided, even in the face of the difficult geopolitical environment and trade disruptions.
The recent cuts by the United States as well as the United Kingdom, alongside a weakened dollar and higher commodity prices, bodes well for emerging markets like South Africa, said Kganyago, but “adverse structural developments” remain.
The Reserve Bank’s decision to hold rates will provide stability in uncertain economic conditions, said FNB chief executive Harry Kellan.
“In making their decision today, the Reserve Bank is maintaining stability and to balance this requirement with wider economic considerations of sustainable growth.
“Keeping rates steady provides stability at a time when global and domestic conditions remain uncertain. With this we urge businesses and consumers to look beyond some of these uncertainties around tariffs, for business in particular, to diversify into new markets as trade routes change.”