SARB’s lower inflation target marks strategic policy pivot

By Tarryn-Leigh Solomons

The South African Reserve Bank’s (SARB) latest 25 basis point cut to the repo rate — reducing it to 7.0% — has received wide attention. Yet, according to Matrix Fund Managers, the real story lies in a longer-term policy adjustment: a formal shift toward a 3.0% inflation target.

Although still operating within the official 3–6% inflation band, the SARB has indicated that it will now treat 3.0% as its new focal point for future policy modelling.

“The 25bps cut was expected by both the market and analysts,” said Kim Silberman, macro economist and fixed income strategist at Matrix Fund Managers. “What’s more significant is that the SARB has now shifted its inflation focus from 4.5% to 3.0%.”

From September 2025, this lower target will guide the SARB’s Quarterly Projection Model (QPM), effectively replacing the previous emphasis on the midpoint of the band introduced back in 2017. Analysts view this recalibration as a deliberate move toward a more conservative and anti-inflationary policy stance.

Forecasts reflect a tighter focus on price stability

The central bank’s updated outlook now sees inflation falling to 3.1% in 2026 and 3.0% in 2027 — sharp downward revisions from previous estimates of 4.2% and 4.4%, respectively. These numbers are notably more optimistic than Matrix Fund Managers’ forecasts.

“The SARB has not made any changes to the structural assumptions in its inflation model,” Silberman noted. “The improved inflation forecasts are purely a result of changing the target.”

On the growth front, changes were more modest: the SARB now expects 1.3% GDP growth in 2026 (down from 1.5%) and 2.0% in 2027 (up from 1.8%).

Lower rates ahead? market less convinced

The QPM suggests a materially lower interest rate trajectory under the revised inflation focus. The model projects the repo rate could drop to 5.8% by 2027, well below the previous low of 7.0% forecast under the old 4.5% target.

However, market participants remain cautious about how far rates can realistically fall.

“We think it will be difficult for the SARB to cut rates by an additional 120bps and simultaneously generate rand appreciation, especially in a global context where the US Federal Reserve is likely to keep rates on hold for longer,” said Silberman.

Clarifying the SARB’s mandate

The SARB’s decision has also reignited debate around the boundaries of its policy autonomy. However, SARB Governor Lesetja Kganyago has reiterated that the bank’s authority to protect the value of the currency stems directly from Section 224 of the Constitution and includes discretion in how it pursues price stability.

“In this context, the governor highlighted that research shows 3.0% inflation better maintains price stability,” Silberman said.

Although the formal inflation band remains intact, the SARB’s operational emphasis is shifting with implications for monetary policy decisions from September onward.

Financial markets respond cautiously

Despite the forward-looking implications of the SARB’s updated guidance, market reaction has been relatively subdued. Long-dated bond yields fell modestly, while the rand and rate derivatives held steady.

“It appears the market is still digesting the news,” Silberman said. “Rate expectations have not fully adjusted to the significant changes embedded in the SARB’s new QPM.”

Long-term outlook still uncertain

While the shift toward a 3.0% target may appear primarily technical, it suggests a firmer policy stance and a more assertive approach to inflation control. The full impact on interest rates, borrowing costs, and currency dynamics will depend on whether inflation remains under control and how the global monetary environment evolves.

As the SARB leans into this lower target, markets, businesses, and households alike will need to reassess their expectations around the future path of interest rates.