By Colleen Goko and Sfundo Parakozov
JOHANNESBURG (Reuters) -South Africa’s government borrowing costs dropped to their lowest in five years after the Reserve Bank announced on Thursday it would lower its inflation goal despite the finance minister not yet signing off on a formal change of target.
“Over the past few months, the prospect of a lower inflation target has bolstered the rand and lowered long-term borrowing costs,” Reserve Bank Governor Lesetja Kganyago said during a press conference. “We will use forecasts with a 3% inflation anchor at future meetings.”
The previous target was 4.5%. Kganyago said the South African Reserve Bank will continue working with the National Treasury “to complete target reform and achieve permanently low inflation”.
South Africa’s benchmark 2035 government bond was stronger by close, with the yield falling to 9.62%, the lowest since February 2020. Yields across the curve also fell following the announcement.
Andrew Matheny, senior economist at Goldman Sachs, said there was room for yields to fall even further than they have now.
“If indeed inflation remains very benign, and inflation expectations continue to come down, we think the next leg of curve repricing could well be at the front end,” Matheny said. “The SARB is signaling a 5.5% terminal rate and market pricing is a little bit below 7% at the moment.”
The central bank also cut its key interest rate by 25 basis points to 7.00%, a move unanimously supported by its Monetary Policy Committee. The decision aligned with the median forecast of economists polled by Reuters.
Meanwhile, the rand remained at its weakest levels since May 15, reflecting investor uncertainty ahead of trade negotiations with the United States. At 1525 GMT the rand traded at 18.1257 against the U.S. dollar. South Africa faces potential tariffs of 30% starting on August 1 unless a last-minute trade deal is reached.
Trade Minister Parks Tau said on Thursday that South Africa is preparing an “enhanced” trade proposal at the urging of U.S. officials. “We’re having to navigate a last-minute proposal that’s enhanced from the proposal that we had initially given,” Tau told South Africa’s 702 radio. “And to tell the truth, it’s wait and see.”
The nation submitted a trade deal proposal to U.S. President Donald Trump’s administration in May and revised it in June but has yet to receive a response.
(Reporting by Colleen Goko and Sfundo ParakozovEditing by Frances Kerry)
