Statement of the Monetary Policy Committee

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank

It has been a turbulent year for the global economy. Trade patterns are shifting, but global growth is holding up better than expected. In the euro area, inflation appears contained. However, in other major economies price dynamics are more challenging, with deflation risk in China, and inflation materially above 2% targets in the United Kingdom, Japan, and the United States (US). In emerging markets (EM), by contrast, inflation has eased. Indeed, 2025 has been better than expected for EMs. This is due to stronger capital flows and a weaker dollar, as well as favourable terms of trade.

Meanwhile, there is an investment boom underway in Artificial Intelligence (AI) infrastructure, accompanied by aggressive valuations for major technology stocks. Despite the promise of AI, there are signs of a bubble inflating. With lower rates, and cheap credit even for riskier borrowers, financial markets appear vulnerable to a correction. If that happens, emerging markets could suffer from spillovers.

Turning to South Africa, growth is looking steadier than last year. The second-quarter outcome surprised on the upside and the third-quarter indicators are looking broadly positive. Our 2025 growth forecast has therefore been revised slightly higher, to 1.3%. We continue to see growth nearing 2% over the forecast horizon. Employment has also been rising.

Household spending has been relatively strong to date, supported by wealth effects, further withdrawals from Two-Pot pension savings, and lower inflation and interest rates. At the same time, investment has disappointed, contracting further in the first half of the year. We expect an investment recovery in the second half, and if this materialises it will be an encouraging signal that the economy is getting back to its historic growth trend. As it stands, growth is better, but not yet healthy.

The risks to the growth outlook are assessed as balanced. Moving to prices, inflation has accelerated somewhat over the past few months, reaching 3.6% for October. This is higher than the 3% average for the first half of the year. The uptick is mainly due to non-core items: meat, vegetables, and fuel. We continue to see this pressure as temporary, with inflation heading lower again from the beginning of next year. Indeed, recent outcomes have undershot our forecasts slightly.

Because of these downside surprises, together with a stronger rand, and a lower oil price assumption, we have small downward revisions to our inflation outlook, for both 2025 and 2026. We remain on track to deliver 3% inflation over the medium term.

For inflation expectations, we do not have an update from our usual survey this meeting, but market rates and surveys of analysts both show further progress towards the 3% objective. Core goods prices are benefitting from exchange rate strength. Food price inflation seems to have peaked, although we have a small upward revision to this forecast, mainly from beef prices. Services inflation is unchanged from the last meeting: the announced medical aid increases are lower than last year’s; at the same time, housing inflation has accelerated, which warrants ongoing scrutiny.

We assess the risks to the inflation outlook as balanced.

Against this backdrop, the MPC decided to reduce the policy rate by 25 basis points, to 6.75%, with effect from 21 November. The decision was unanimous. Members agreed there was scope now to make the policy stance less restrictive, in the context of an improved inflation outlook.

The Quarterly Projection Model continues to forecast gradual rate cuts as inflation subsides. As before, this rate path remains a broad policy guide. Our decisions will continue to be taken on a meeting-by-meeting basis, with careful attention to the outlook, data outcomes, and the balance of risks to the forecast.

For this meeting, we considered two risk scenarios.

The first scenario featured a US dollar rebound, recognising that while the rand has appreciated this year, this partly reflects broad dollar weakness, not just rand strength. In this scenario, the rand depreciates back to its 2023 levels against the dollar, rather than holding on to its recent gains, as in our baseline.

The second scenario was based on higher administered prices, linked to a rapid correction of the R54 billion electricity pricing error disclosed a few months back. The scenario also had inflation expectations staying higher for longer, in response.

Both scenarios featured tighter monetary policy, with rates coming down more slowly compared to the baseline. The administered price scenario in particular shows that if price setters take on board the 3% target, we will have space to get to lower rates faster.

This brings us to the subject of the new target. As announced last week, we have moved away from the 3-6% target range, which was established 25 years ago. The revised target, agreed between the Minister of Finance and myself as the Governor of the South African Reserve Bank, is 3% plus or minus 1 percentage point.

As we move from a range target to a point target with a tolerance band, it is important to understand what the new target means.

The tolerance band, of 1 percentage point either side of 3%, does not mean we will be indifferent to inflation anywhere between 2% and 4%. We want to be at 3%.

However, no central bank has the tools to deliver inflation at an exact point all the time. As flexible inflation targeters, we also recognise that trying to offset all price shocks would create undesirable volatility in output.

To support communication and accountability, we therefore want it understood that inflation will not always be precisely 3%.

When there are deviations, we will explain what has driven inflation away from target, and we will do what is required to get back to target.

Most of the time, we should be expected to keep inflation within the tolerance band, with breaches occurring only when there are severe shocks. We will always be setting policy so that inflation is going back to 3%.

Monetary policy actions have their main effects on prices after 12 to 24 months, so you should expect us to achieve our target over that horizon. Accordingly, we want longer-run expectations to anchor at 3%, staying there even when there are shocks. This lag, between monetary policy decisions and outcomes, also explains why the 3% target is taking effect now, but will be achieved over the forecast period.

The MPC has long emphasised the need for macroeconomic and structural reforms to boost potential growth, achieve a sustainable debt path, and shift to a low-inflation regime. There has been significant progress on reform this year, as underscored by the recent credit rating upgrade from Standard & Poor’s, as well as South Africa’s exit from the Financial Action Task Force grey list. The global environment nonetheless remains challenging, so it is urgent to sustain domestic reform efforts.