By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
No rate cut, not yet
The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 6.75% at their January 2026 meeting. Two members favoured a 25-basis points (bps) cut while four preferred a hold, suggesting that there is still space to continue easing monetary policy but caution prevailed. Ultimately, we are likely to get more cuts going forward. For this year, we think two, the market thinks three, and the SARB's Quarterly Projection Model (QPM) repo rate path is somewhere in between. Below we unpack the outlook on South Africa (SA) from the statement and explain where we differ.
Growth
The MPC views SA's economic growth as more stable. After four consecutive quarters of expansion, the economy is expected to continue growing in 4Q25. However, unlike most of 2025, growth in investments should compound gains from household spending over the medium term. That said, the SARB has not changed its growth forecast but noted upside risk instead. We see slightly higher growth this year but slower than the SARB over the period to 2028 (Figure 1). Should the SARB's upside risk materialise while coupled with productivity enhancements, this would still allow policy to shift into neutral territory.
Inflation
Inflation remains benign, and broader expectations for inflation are becoming more consistent with the new target. While further declines are anticipated as households experience lower inflation for a sustained period, sticky administered price inflation remains a risk to the speed of adjustment. The SARB has revised its inflation forecast marginally, and it's slightly higher than ours for 2026 (Figure 2). This is because they expect higher oil and fuel prices; stickier food inflation; and higher electricity inflation. The SARB views risks as balanced and if their outlook proves correct, the MPC should be able to deliver the easing shown by the QPM repo rate path.
The path forward
We still view the policy rate as restrictive and think low inflation and a lower risk premium will uphold the space to neutralise the impact of monetary policy on the economy. The SARB's scenario analysis highlights that the shift to lower, and more stable, inflation alongside policy credibility (with expectations better anchored) will enable the economy to be less vulnerable to price shocks and policy to be less responsive. Policy credibility being extended to the real economy should also insulate private investment, structural growth, and employment. Together, inflation that stabilises at the 3% target and an economy growing in line with its potential are consistent with the repo rate at its neutral level. The SARB thinks that level is 6%, and the QPM sees us getting there next year. A speedier shift in inflation expectations would get us there earlier. We think the neutral interest rate level is lower but see SA getting there at a slower pace. Either way, the consensus is that more cuts are coming.
Week in review
The leading business cycle indicator increased by 1.4% m/m to 118.4 points in November, which reflects 3.3% annual growth versus 2.3% previously. This rise was supported by an increase in eight out of ten available components, with the largest contributions coming from an increase in the trend growth rates of real M1 money supply and job advertisement space. The largest negative contributors were a narrowing of the interest rate spread and a decrease in new passenger vehicles sales trend growth.
Producer inflation held at 2.9% y/y in December, unchanged from November. On a monthly basis, producer prices increased by 0.2% following a flat outcome previously. Food products, beverages, and tobacco were the biggest contributors to headline inflation, while notable increases also emerged in categories such as furniture and other manufacturing. Overall, producer inflation averaged 1.5% in 2025, down from 3.1% in 2024, reflecting a moderation driven largely by lower petroleum-related product prices, including diesel and petrol. Meanwhile, producer food inflation averaged 3.5%, slightly below the 3.7% average recorded in 2024.
Private Sector Credit Extension (PSCE) growth was 8.7% y/y in December, up from 7.8% in November. Corporate credit continues to lead the surge, rising by 12.9% following an 11.4% increase in the previous month. Within corporate credit, the largest contribution came from general loans and advances, which increased by 16.2% y/y compared to 16.7% in November. Growth in corporate mortgage advances was steady at 6.6%. In other corporate credit categories, slight increases were noted in vehicle asset finance (7.4% y/y, previously 6.8%) and overdrafts (5.2% y/y, previously 3.1%). Household credit growth lifted to 3.7% y/y, up from 3.5% in November. Changes within the household segment were mostly minor, with slight increases noted in general loans and advances (2.2% y/y, previously 1.2%), car finance (8.1% y/y, previously 7.8%) and leasing finance (16.3% y/y, previously 15.6%). Overdrafts continued into negative territory, coming in at -8.0% compared to -8.7% previously. Households are showing a cyclical recovery; however, monetary policy remains restrictive and is ultimately weighing on lending appetite and credit uptake.
Week ahead
On Monday, manufacturing PMI data for January will be released. Manufacturing PMI (seasonally adjusted) fell to 40.5 in December, remaining in contractionary territory. The decline was mainly driven by sharp drops in inventories and employment. The inventories sub-index fell 9.9 points to 36.1, while employment fell 6.3 points.
Also on Monday, new vehicle sales data for January will be released. Vehicle sales volumes rose 19.2% y/y in December, led by a 20.3% increase in new passenger car sales and a 16.4% rise in new commercial vehicle sales.
On Thursday, electricity production data for December will be released. Electricity generation declined by 7.0% y/y in November, following a 5.2% decline in October. On a seasonally adjusted basis, generation fell 1.1% m/m in November, after a 0.4% m/m decline in October. Over the three months ending November 2025, electricity production decreased by 2.6% compared with the previous three months.
On Friday, South Africa's gross foreign exchange reserves data for January will be published. Reserves rose to $75.89 billion in December, up from $72.07 billion in November. The central bank's forward position improved noticeably, and Special Drawing Rights (SDR) holdings increased modestly.
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