SARB faces pressure after shifting inflation target to 3%

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Emilio Ghigini

22.08.2025

SARB faces pressure after shifting inflation target to 3% — Policy rift emerges as SARB pushes toward lower inflation

A recent statement by South African Reserve Bank (SARB) Governor Lesetja Kganyago that monetary policy decisions would be based on achieving 3% inflation has drawn disagreement within the government and left the central bank in a state of uncertainty. Should it continue cutting rates with the new target, or raise them instead?

Previously, the six-member Monetary Policy Committee (MPC) based rate decisions on achieving 4.5% — the midpoint of the 3–6% target range. The new target is expected to alter MPC’s actions.

Since September 2024, the SARB has cut rates by 125 basis points, bringing the repo rate to a neutral 7.0% following a sharp decline in inflation. Bank projections suggest further reductions: 25 basis points in 2025, and potentially 125 basis points across 2026 and 2027, provided South Africa maintains inflation at 3%. However, the latest figures cast doubt on this outlook.

According to Stats SA, consumer price inflation rose by 0.5 percentage points to 3.5% in July 2025. Food, non-alcoholic beverages, housing, and utilities made the largest contributions.

Food inflation has accelerated, with monthly price increases in meat and vegetables reaching double digits. Housing and utilities costs climbed 4.3% year-on-year, supported by the removal of various municipal levies.

Water tariffs jumped 12.1% in 2025, compared with 7.5% in 2024. Electricity tariffs rose 10.6%, still below the 11.5% recorded last year. For the first time, refuse removal and sewage costs were added to the inflation basket, rising 6.6% and 6.5% respectively.

These utility costs form part of the broader inflationary trend. Without them, overall inflation would have been only 3.1%.

Playing together

Economists now question how SARB can achieve the 3% target without government support. If the government fails to align spending with the new goal, the central bank may be forced to raise rates to compensate.

Adriaan Pask, chief investment officer at PSG Wealth, noted that while inflation remains within the target band, the upward trend may reduce the likelihood of further cuts.

FNB economists emphasized the need for government alignment: “Essentially, the government’s failure to fully commit to the 3% inflation target will undermine the effectiveness of SARB’s new stance.”

As a result, monetary policy might have to remain more restrictive than desired to counter price dynamics inconsistent with the rapid achievement of the new target.

With inflation in South Africa climbing sharply, SARB may have fewer opportunities to cut rates in the near term.

As we wrote, SARB warns of inflation risks ahead of July interest rate decision

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