Inflation for 2025 has come in at 3.2% – just marginally higher than the 3% target set by the Reserve Bank. Even though towards the end of 2025, there was a slight up take in inflation with the last week of December coming in at 3.6%.
So, while our eyes turn towards the Monetary Policy Committee’s meeting which takes place next week, the announcement on the repo rate will be made on Thursday, the 29th and it’s our view that the Bank will decide to leave rates unchanged in January. Even though, the longer-term forecast for this year appears for us to include a 50-basis point reduction throughout the course of 2026.
The reason for the caution in January could be the amount of uncertainty as well as the most recent inflationary read being at 3.6%. The uncertainty is geopolitical as we start the new year and there’s a lot of time for the Bank, in order to make its decision to decrease rates by a further 50 basis points, probably in two lots of 25 basis points reductions throughout 2026.
One of the important factors in this regard is that if we look at the real interest rate which is basically taking the repo rate – currently at 6.75% – and subtract the most recent inflation of 3.6% we get a real interest rate of 3.15%. Our prediction is that in the second quarter of this year, inflation could drop to as low as 3%, which means that your real interest rate would move up closer to that 4% range and therefore give the Bank a lot of space in order to reduce the repo rate further.
Even if inflation came in slightly above the 2025-year level in 2026, which is our expectation mostly due to base effects because of the low inflation that we saw last year.
2027 – We see this converging on the new target level, and I think this forecast is also in line with that of the Reserve Bank. So, I think no reduction in the repo rate will be seen in January. Possibly in March and again in May or possibly March and sometime later in the year we will see those reductions in rates.
