Will Reserve Bank cut repo rate on Thursday?

The Monetary Policy committee will meet this week before the South African Reserve Bank (Sarb)announces its decision about the repo rate on Thursday afternoon. Debt-ridden and broke consumers are especially interested in what the decision will be to see if they will have a few more rands in their pockets afterwards.

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano and Ame Muller, economists at FNB, point out that the Monetary Policy Committee (MPC) already lowered the repo rate from 8.25% at the start of 2024 to 6.75% by the end of 2025.

However, they say, even with this, policy remains restrictive by their estimate of the rate that is neutral on the economy and considering expected inflation. “The question is, how restrictive does the MPC plan on keeping policy to influence pricing behaviour sufficiently and ensure that medium-term inflation is anchored at 3%?

“We may not have an answer to this question yet, but there are multiple factors that could shift the MPC in different directions. Therefore, to the question of whether the MPC will cut interest rates again at their upcoming meeting on 29 January, the answer is yes, no and maybe.”

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Will it be a yes?

The MPC delivered 25 basis point cuts in July, when it unilaterally shifted to the lower target and again in November, despite fears that a lower target would cause the committee to be more conservative as they worked to guide expectations lower.

“Instead, not only did the MPC appear willing to look through temporary increases in inflation, but they likely also believed that expectations would be more dynamic, especially in an environment of slow inflation.

“Based on the Bureau of Economic Research (BER) survey covering analysts, trade unions and business for the fourth quarter, both two-year-ahead and five-year-ahead inflation expectations shifted from 4.2% to 3.7% – with only business still around 4%.”

The economists say with soft core goods inflation and fuel deflation, headline inflation should ease further this year and would support a continued compression in expectations. This could be enough for another cut.

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Could it be a no?

“While the speed of adjustment in expectations in the fourth quarter is encouraging, we did see a similar move in the first quarter of 2018 after the MPC announced its preference for 4.5%, but adjustments slowed thereafter,” the FNB economists say.

“Therefore, this could be a knee-jerk reaction and the MPC could decide to spend time assessing the response of government budgeting processes alongside continued moral suasion towards price setters before easing policy again.”

They say if the Sarb thinks that the rand’s strength is not durable, sees a faster closure of the output gap and accelerated services inflation and focuses on general price rigidities in the economy, this could be enough to maintain current restrictiveness.

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Could it be a maybe?

This cutting cycle has been relatively staggered, the FNB economists say. “We are living in volatile times and we heard that the only thing that has become certain is uncertainty. Therefore, there are certainly odds that the MPC cuts again next week. We predicted that rates will be unchanged and therefore the final answer is maybe.”

Bianca Botes, director at Citadel Global, points out that Sarb governor, Lesetja Kganyago, reinforced the positive narrative at Davos, expressing confidence that South Africa’s 3% inflation target will be achieved in 2026, ahead of initial 2027 expectations.

In addition, South Africa’s December inflation rate, which came in at 3.6% and full-year 2025 inflation at 3.2%, marked a 21-year low in local inflation numbers and provides ammunition for continued easing, she says.

“The Sarb’s lower target anchors expectations, reduces the risk premium on South Africa assets and creates scope for rates to fall further than previously anticipated. The Sarb’s Quarterly Projection Model suggests the repo rate could decrease to 5.8% by 2027. Markets are also pricing in a 25-basis-point cut.”

Inflation in South Africa is well under control

Independent economist, Elize Kruger, thinks the Sarb has scope to cut interest rates by 25 basis points on Thursday to lower the repo rate to 6.5% (current rate: 6.75%).

For her this is justified because inflation is well under control in South Africa, the rand is at its best level in years, oil prices are trending lower, fuel prices stabilised last year, inflation expectations started drifting lower and because the Sarb’s current restrictive monetary policy stance is unjustified in the current economic scenario.

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“After the actual outcome of inflation at 3.2% in 2025, my Headline CPI (and Core CPI) forecast for 2026 is at 3.4%, comfortably within the tolerance band around the new 3% target.”

Rand exchange rate at the best level in three years

Kruger says the stronger rand exchange rate has a positive impact on the inflation outlook via lower imported prices, a positive impact on fuel and food prices.

The rand is about a R1/$ stronger now compared to the previous MPC meeting on 20 November, she notes.

International oil price trending lower

“International oil price is forecast to average $64/bbl or lower in 2026. While the Sarb’s average oil price forecast at $67/bbl for 2026 seems too high, given an expectation of an over-supply scenario developing during the course of 2026.”

She points out that the average oil price was $68/bbl in 2025; $65.4/bbl in the last half of 2025 and $62.9/bbl over the last three months of 2025. “The recent spike upwards reflected supply concerns related to Iran protests and does not reflect the fundamentals of the international oil market which actually points to lower prices. Expect the Sarb to trim its oil price forecasts, having a positive impact on its CPI outlook.”

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Fuel prices stabilised on average

Fuel prices on average stabilised in 2025, with decreases recorded in seven of the 12 months, Kruger says. “The petrol price dropped in January 2026 and is forecast to drop by a further 60c/l in February. Lower fuel costs filter through the whole economy as a cost benefit. With the expectation of a lower average international oil price and another year of reasonably strength in currency, further fuel price decreases could be coming in 2026.

Lower BER inflation expectations

The BER’s inflation expectations continued to drift lower in recent quarters, a trend that should be followed by lower wage settlements during 2026.

Sarb’s current restrictive monetary policy stance unjustified

Kruger says the Sarb’s current restrictive monetary policy stance is unjustified in the current economic scenario.

“With inflation well under control, the economy still stuck in low growth mode (no evidence of demand driven inflation pressure) and risk indicators subsiding (as reflected in lower CDS spreads, lower SAGB yields), the current level of real interest rates in South Africa is too high.

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Consider these calculations

Kruger calculates that the current repo rate minus average CPI in 2025: 6.75 – 3.2 = 3.55% real interest rate compared to the Sarb’s indication of a real neutral interest rate of 2.8% with a restrictive stance to the extent of 75 basis points.

Forward looking she calculates that the current repo rate minus forecast average CPI in 2026: 6.75 – 3.4 = 3.35% real interest rate compared to the Sarb’s indication of a real neutral interest rate of 2.8% with a restrictive stance to the extent of 55 basis points.

“Considering these factors, adding in stable global growth forecasts, it would be difficult for the Sarb to argue that a delay in cutting interest rates has any merit,” Kruger says.