Reserve Bank cuts repo rate by 25 basis points to 7.25%

The Reserve Bank struck a cautiously dovish tone on Thursday, trimming the repo rate by 25 basis points to 7.25% — a move that places it in line with market expectations amid subdued inflation and sluggish growth prospects.

The verdict after the two-day monetary policy meeting takes the repo rate to its lowest level in more than two years.

All six members voted for a cut, with one preferring a 50 basis points cut. With sluggish indicators across mining and manufacturing, and rising unemployment, the Bank also shaved its inflation and growth projections downward.

Governor Lesetja Kganyago was dovish but measured. In his address, Kganyago said inflation remained well contained, with headline consumer price inflation falling below 3% in April and core inflation also at the bottom end of the 3%-6% target range.

In its quarterly projections, the Bank revised its inflation outlook downward, citing a stronger rand, lower oil prices, and the cancellation of VAT increases previously factored into its models.

The central bank now expects inflation to average 3.2% this year (down from 3.6%), 4.2% in 2026 (down from 4.5%), and 4.4% in 2027 (down from 4.5%) — a projection that implies that there may be room for further monetary policy easing.

“We see balanced risks to this forecast,” Kganyago said.

“The threat of rand depreciation that we warned of at our last meeting, given both global and domestic factors, manifested last month, with the currency briefly touching a multiyear low against the dollar,” he said.

“However, the exchange rate has since recovered and conditions seem more settled than they did in March, even if the global environment remains uncertain.”

FNB chief economist Mamello Matikinca-Ngwenya said the macroeconomic outlook “is benign, providing ample space for a continued cutting cycle”.

“Should muted local inflation and expectations that the Fed will resume its cutting cycle before year-end prevail, our current view that another 25 basis points cut is probable this year would be supported,” she said.

Still, Kganyago flagged several global risks — from escalating trade barriers to elevated uncertainty. The Bank’s monetary policy committee (MPC) considered an adverse scenario, triggered by escalating trade tensions, in which the rand depreciates sharply — a development that could tip the scales towards a global slowdown.

Such a scenario raises the prospect of stagflation in SA — a combination of slowing growth and rising inflation, which would require a tighter monetary policy stance.

While the first quarter’s GDP data is not yet available, Kganyago noted that indicators for sectors such as mining and manufacturing have been disappointing and unemployment has risen.

The outlook for structural reforms remains positive, however there are headwinds such as lower global growth, he said.

“Given the lower forecast, we assess the risks to growth as balanced,” Kganyago said.

“In our last meeting, we warned of downside risks to our growth forecast. We have now trimmed our GDP projections and currently expect growth of 1.2% this year, rising to 1.8% by 2027.”

In 2026, the Bank expects 1.5%. The revised growth forecast for 2025 is slightly above that of the IMF (1%) and trails the latest projections by the Bureau for Economic Research (1.5%), Moody’s (1.5%), and the Treasury’s 1.4%, as outlined in the third iteration of the 2025 budget.

Kganyago said the Bank had modelled a scenario with a 3% inflation target, which showed a lower interest rate path — falling below 6%, down from more than 7% in the baseline — and more stable inflation expectations, though at the cost of slower growth initially.

He noted that “the MPC is of the view that the 3% scenario is more attractive than the 4.5% baseline” (the Bank’s current midpoint) and added that technical work on narrowing the range in consultation with the National Treasury was at an advanced stage.

Frank Blackmore, lead economist at KPMG, said “this puts us closer in line with many of our trade partners as well as being closer to the median emerging market rate of about 3%”.

“In this situation, the benefits would also fall to all South Africans, meaning that lower inflation would preserve the value of the earnings and wealth in future periods. Given the low inflation that we are currently experiencing, this would be the right time to institute such a change,” Blackmore said.

Update: May 29 2025
This story has been updated with additional comment and background information.

marxj@businesslive.co.za