Reserve Bank Holds Repo Rate at 6.75%

The Reserve Bank has decided to hold the repo rate at 6.75%, citing increased domestic risks and a significant shift in the global political landscape. This decision was made after the monetary policy committee’s (MPC) first meeting of 2026, where two members voted for a rate cut, while four preferred to keep the rate unchanged.

Reasons Behind the Decision

According to Bank governor Lesetja Kganyago, the decision to hold the rate was influenced by several factors, including new threats to central bank independence and the start of 2026 with a new round of shocks. Kganyago also highlighted electricity costs and food inflation, particularly meat prices, which are being affected by the foot-and-mouth disease outbreak, as key risks to monitor.

Global Economic Uncertainty

Kganyago noted that markets are jittery, and precious metals like gold have received safe-haven flows. There are also ongoing risks of an AI bubble, which could impact the global economy. The Bank’s decision comes after the US Federal Reserve’s decision to pause its rate-cutting cycle, which the MPC monitors closely as shifts in global interest rate differentials can influence capital flows and the rand.

Impact on the Economy

The decision to hold the repo rate at 6.75% has had a positive impact on South African bonds, with the yield on the blended 10-year dropping to its best level since July 2019. The rand has also strengthened, gaining 0.3% to R15.72/$. The Bank’s decision marks the second MPC meeting since the 3% inflation target was formally adopted and comes ahead of the national budget in February.

Inflation Forecast

While consumer inflation edged up slightly in December to 3.6%, the annual average for 2025 was 3.2%, the lowest since 2004 and well within the Bank’s official 3% target. The Bank now expects inflation to have peaked in December and to slow from here, with a lowered 2026 inflation forecast of 3.3% due to a stronger rand and lower oil price assumption.

Scenarios Considered by the MPC

The MPC considered two scenarios: one favourable and one adverse. In the favourable scenario, the rand strengthens further, and oil prices continue to drop, leading to a temporary slowing in inflation to 2.3%. In the adverse scenario, the rand weakens, and oil prices rise again, with inflation peaking at 4%. These scenarios demonstrate how supply shocks interact with inflation expectations, affecting how fast the Bank delivers on the 3% target.

Conclusion

In conclusion, the Reserve Bank’s decision to hold the repo rate at 6.75% is a cautious approach, taking into account the increased domestic risks and global economic uncertainty. The Bank’s decision will be closely monitored, particularly with the national budget approaching in February. As the economy continues to navigate through challenges, the Bank’s commitment to achieving the 3% inflation target remains a top priority. With the rand strengthening and inflation expectations declining, the Bank is poised to make further decisions to support the economy and achieve its inflation target.