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CPI and Interest Rates May 2025

The South African Reserve Bank’s Monetary Policy Committee (MPC) lowered the repo rate by 25 basis points in May 2025, citing a more favourable inflation outlook and subdued economic growth. Inflation dropped below 3% in April, driven mainly by falling fuel prices, a stronger rand, and the cancellation of previously planned VAT increases. Core inflation remained stable at 3%, the bottom of the SARB’s target range. Despite volatility in global markets, including US trade tensions and fluctuating interest rates abroad, domestic price pressures appear contained.

South Africa’s growth outlook has been revised downward, with GDP for 2025 now expected at just 1.2%, impacted by weak performance in sectors like mining and manufacturing, and higher unemployment. Although the long-term structural reform agenda remains intact, lower global growth and domestic vulnerabilities continue to weigh on prospects.

The MPC highlighted the risk of stagflation in the event of renewed rand weakness, as well as a scenario under consideration that would lower the inflation target from the current midpoint of 4.5% to 3%. In this alternative framework, inflation expectations would shift lower, enabling a more sustained path of interest rate reductions. However, achieving and maintaining low inflation would require fiscal discipline, improvements in network industries, moderation in administered prices, and wage growth aligned with productivity.

In essence, while the immediate interest rate cut is justified by a benign inflation environment and weak growth, the SARB is also laying the groundwork for a potential strategic shift toward a lower long-term inflation target to support sustainable monetary easing.

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