01 OCT 2025

MPC decision a close call

by Raymond Parsons: Professor at the NWU School of Business & Governance and a former special policy adviser to Busa.

As widely expected, the MPC decided (by a 4-2 vote) to again pause in its interest rate easing cycle for now. The MPC saw the risks around the inflation outlook as balanced, and inflation as now contained. It predicted headline inflation as averaging out at 3.4% in 2025, with core inflation around 3%. On the growth front the MPC raised its 2025 GDP forecast from 0.9% to 1.2%, but cautioned that a much better level of fixed capital formation was needed as a key driver of a future healthy growth rate.

Given the overall balance of risks now facing the SA economy the minority MPC view was nonetheless right to prefer another cut of another 25 bps in interest rates. Positive forces supporting this view would include factors such as average inflation in 2025 now being close to 3%, lower inflationary expectations, an easier US monetary policy, a stronger rand, and no evidence of demand inflation. While the decision remained a close call, on the data available the minority MPC view wanting to continue the interest rate easing cycle was the better judgement call.

The cautious stance by the majority of the MPC would thus seem to be rather linked to wanting to keep rates higher for longer to entrench its preferred lower 3% inflation target. Yet there still seems to be continued uncertain circumstance around moving to the SARB’s preferred lower 3% inflation target. The SARB also again confirmed that there may be a short-term sacrifice in growth to attain the longer-term advantages of its 3% target.

A previous joint SARB-National Treasury statement on September 1 indicated that Finance Minister Enoch Godongwana and the SARB "are still to agree to any changes in the target". And Deputy Finance Minister David Masondo told an investment conference on September 15 that ‘the existing 3%-6% target remains operational and that any decision to change it should not be taken lightly’.

While there is widespread support that a lower inflation target for SA should now be explored, it is therefore not yet entirely clear whether the necessary political support and ‘buy in’ has been secured for the inflation target change. The future level of borrowing costs is a crucial area of decision-making for the economy, for which a settled official inflation targeting framework is highly desirable for policy certainty. The sooner this is decided, the better.

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