South African Reserve Bank Cuts Rates to 6.75%, Tightens Inflation Target

Johannesburg woke Thursday to news that the South African Reserve Bank had cut its main lending rate to 6.75%, a move that signals the central bank's confidence that the country's inflation problem is finally loosening its grip. The decision marks a restart of the rate-cutting campaign that began in September 2024, when policymakers started bringing down borrowing costs from a 15-year peak of 8.25%.

Governor Lesetja Kganyago framed the cut as a response to moderating price pressures and improving economic conditions. Headline inflation stood at 3.6% in October, a slight uptick from 3.4% the previous month, but still well below the levels that had prompted the Reserve Bank to hold rates at their punishing highs for so long. The bank now expects inflation to continue its downward trajectory, supported by what Kganyago described as broadly positive economic indicators.

Alongside the rate cut came a significant shift in how the Reserve Bank will measure its own success. For a quarter-century, the central bank had operated under an inflation target range of 3% to 6%, a band wide enough to accommodate the volatility that had periodically seized South Africa's economy. That framework is now gone. The bank has adopted a single point target of 3%, with a tolerance band of plus or minus one percentage point around it. Kganyago was direct about the intention: "We want to be at 3%." The narrower target reflects a harder line on price stability, a signal that the bank believes it has earned room to be more demanding.

The rate cut also rests on an improving growth outlook. The Reserve Bank revised its 2025 gross domestic product forecast upward to 1.3%, from 1.2% projected just two months earlier in September. That upgrade came on the back of stronger-than-expected economic performance in the second quarter and what officials characterized as encouraging signals emerging from the third quarter. For an economy that has struggled with anemic growth for years, even a modest upward revision carries weight.

The combination of moderating inflation and accelerating growth creates the conditions under which central banks typically feel comfortable easing monetary policy. South Africa's Reserve Bank appears to have concluded that the worst of the inflation cycle has passed, and that the economy has enough momentum to absorb lower borrowing costs without reigniting price pressures. Whether that confidence proves justified will depend on whether inflation continues its descent and whether the growth momentum the bank sees in the data proves durable in the months ahead.