Africa-Press – South-Africa. South Africans can expect further interest rate relief in 2026 as inflation comes down to the Reserve Bank’s new 3% target, the state’s risk premium lowers, and the US Federal Reserve continues to cut rates.
Geopolitical tensions also appear to be easing, and the South African government’s financial health is improving, enabling the bank to focus on local inflation dynamics.
An often forgotten factor to consider is the rand’s strength versus the dollar, which makes importing goods cheaper and thus ensures inflation remains subdued.
This is feedback from Symmetry’s chief investment strategist, Izak Odendaal, who outlined what 2026 has in store for the Reserve Bank in a recent research note.
Odendaal explained that monetary policy in South Africa has been tight for much of the past decade, apart from the emergency interest rate cuts when the pandemic hit in 2020.
This has been due to a combination of factors, such as South Africa’s elevated risk premium, which makes it more expensive for the government to borrow money, a weak and volatile rand, and declining investor confidence in the country.
The Reserve Bank hiked the repo rate by 50 basis points at the first monetary policy committee meeting after Nenegate in January 2016 and arguably kept interest rates high even when inflation started declining, Odendaal said.
Nenegate refers to the firing of Finance Minister Nhlanhla Nene on 9 December 2015 after he resisted President Zuma’s project of State Capture.
Nene was replaced by Des van Rooyen, who was only in the post for a weekend before he was replaced by Pravin Gordhan.
This event, and the era of State Capture and economic mismanagement, essentially forced to be the grown-up in the room, Odendaal said.
The Reserve Bank had to provide policy credibility where none was available from other branches of government.
To put it simply, it kept rates elevated to prevent destabilising capital outflows and an even worse collapse in the rand.
This constrained economic growth in South Africa by making borrowing prohibitively expensive, but it did stop a disorderly plunge in the rand’s value and stabilised the financial system.
The script is flipped
Odendaal said that the tide is eventually turning with regard to elevated interest rates in South Africa, with improving government finances and a lower inflation target set to result in structurally lower rates in the country.
Firstly, with fiscal policy credibility improving and the twin deficit narrowing, the country risk premium is lower, allowing the Reserve Bank to focus on domestic inflation dynamics.
The National Treasury’s policy of fiscal consolidation appears to be bearing fruit in this regard, with debt as a share of GDP set to peak in the current financial year and gradually come down.
This process has been painful, with fiscal consolidation effectively resulting in taxpayers paying more for less from the government. This constrains economic growth to an extent.
The second major factor is the Reserve Bank’s new 3% inflation target, which was announced by the Finance Minister at the Medium-Term Budget Policy Statement.
If the 3% inflation target can be achieved, interest rates will naturally decline. The repo rate has already fallen from 8.25% to 6.75% over the past year and is likely to continue declining gradually. This will further support economic growth and a rerating in South African assets.
Odendaal also explained that the Reserve Bank’s own projection models indicate that interest rates will continue to come down in South Africa.
Its quarterly projection model is a forecast of where the repo rate should be, given all the other economic assumptions made by the Reserve Bank. The QPM points to rates declining to 6% by 2027.
The Reserve Bank always reiterates that the QPM is merely a guide and that decisions are taken on a meeting-by-meeting basis, but it does indicate what a reasonable path for interest rates looks like.
The Reserve Bank expects inflation to peak at 3.8% in the second quarter of next year, before falling to around 3%, with an average rate of 3.5% in 2026 and 3.1% in 2027. If inflation behaves as expected, interest rates should continue falling.
Another positive development is the US Federal Reserve’s continuation of interest rate cuts in the world’s largest economy.
Though it doesn’t always follow the Fed, the Reserve Bank keeps a close eye on it due to the outsized influence of American markets on global finance.
Ultimately, global markets determine how freely emerging market central banks can act. If the Fed turns hawkish at its upcoming meetings, pausing the cuts and changing the outlook, it could lead to a stronger dollar and increased market anxiety.
That will close off space for the Reserve Bank and other central banks to ease. If, however, the Fed continues to gradually ease, the Reserve Bank will have more confidence to do the same.
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