Kganyago’s improved outlook comes with higher borrowing costs

The Reserve Bank governor sees healthier longer-term prospects for South Africa, while renewed inflation pressures have prompted a rise in the policy rate.

South Africa’s policy rate rose to 7.25 percent from 25 September after a unanimous Monetary Policy Committee decision to increase it by 25 basis points. The decision makes borrowing more expensive where lending rates adjust in response.

Governor Lesetja Kganyago’s later remarks, reported by SABC on 28 September, sketched a less bleak horizon after a long stretch of poor growth, rising public debt and elevated inflation. His assessment concerned the medium-term outlook, while the rate decision addressed immediate inflation pressures.

Fuel prices complicate the inflation outlook

The September policy statement highlights renewed fuel-price pressure and the risk that a persistent external cost shock spreads into other prices. The Bank expects inflation to exceed 5 percent later this year and early next year, before returning towards its 3 percent target late in 2027. These are forecasts dependent on how conditions develop.

A recovery with limited room for setbacks

Growth remains weak. The economy contracted by 0.2 percent in the second quarter, and the Bank projects annual growth of 1.2 percent. Its expectation of a second-half rebound remains exposed to worsening global conditions. Over the medium term, stronger growth depends partly on domestic reforms improving the business environment.

The Bank’s modelling suggests broadly stable policy rates for the rest of the year and cuts later as inflation eases. The committee has not committed itself to that path: decisions will continue to reflect the data and risks at each meeting.

What borrowers will feel

The household effect depends on the credit agreement. Borrowers with variable rates linked to a bank’s prime rate may face higher repayments when that rate changes. Fixed-rate agreements follow their contracted terms. The size and timing of any adjustment should therefore be checked against the lender’s notice and the agreement.

For a household already balancing food, transport and housing costs, a higher repayment reduces what is left for other spending. Businesses using variable-rate finance can face similar pressure on their operating budgets. The effect of tighter credit can therefore reach beyond the borrower’s monthly statement.

A better economic outlook can take time to reach household budgets. Lower inflation would slow the pace of price increases; it would not generally return prices to their earlier levels. The governor’s longer-term assessment depends on improvements that must still work their way through growth, investment and employment, while the September interest-rate decision has a more immediate effect on affected borrowers.