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Economy January 26, 2026

SARB at a Crossroads: Hold Rates or Trim 25 Basis Points as Inflation Eases

UBS sees a bias toward maintaining policy ahead of budget and updated inflation data, while rand strength and falling expectations leave room for a cut

By Sofia Navarro
SARB at a Crossroads: Hold Rates or Trim 25 Basis Points as Inflation Eases

The South African Reserve Bank faces a close call this week between keeping its policy rate unchanged or implementing a 25 basis point reduction. UBS analysts say their view is tilted toward no change, as the central bank may prefer to wait for the March meeting after reviewing the government budget due February 12 and January inflation adjustments. While a stronger rand and lower inflation expectations could justify a cut at Thursday's meeting, the bank's recent effort to reduce the prime rate may encourage caution.

Key Points

  • UBS analysts say their expectations are tilted toward no change in the SARB's rate decision this week.
  • The central bank may prefer to wait until the March meeting after reviewing the government budget due February 12 and January inflation adjustments.
  • A 25 basis point cut could be supported by lower Quarterly Projection Model inflation forecasts and a 6.3% strengthening of the rand since the November meeting.

The South African Reserve Bank (SARB) confronts a finely balanced decision on interest rates this week: maintain the current policy rate or approve a 25 basis point reduction, according to an analysis published by UBS on Monday.

UBS analysts report that their expectations are "tilted in the direction of no-change," signalling that the central bank may opt to hold rates. Part of that rationale is a preference to await additional information at the March meeting, when policymakers will have had a chance to assess the government budget scheduled for February 12 and to review inflation data for January.

Another element weighing against an immediate cut is the SARB's recent initiative to bring down the effective lending cost for local banks, the prime rate, which is currently set 350 basis points above the policy rate. UBS suggests the central bank may be reluctant to ease policy again while that effort is underway.

Conversely, UBS notes factors that could support a 25 basis point reduction at the upcoming meeting. The bank expects the Quarterly Projection Model (QPM) inflation forecasts to decline, a shift that would be reinforced by the South African rand's 6.3% appreciation against the U.S. dollar since the November meeting. Ongoing declines in inflation expectations are also identified in the analysis as potential justification for easing policy at Thursday's session.

Despite these arguments in favour of a cut, UBS's overall judgement remains that the central bank is more likely to keep rates unchanged this week. The analysis frames the decision as contingent on a set of near-term data and policy considerations, including the pending budget review, January inflation adjustments, the trajectory of inflation expectations, and the authorities' recent steps to influence the prime lending rate.

Impacted areas highlighted in the analysis

  • Banking sector - through the prime rate and efforts to reduce banks' effective lending costs.
  • Currency markets - via the rand's 6.3% strengthening against the U.S. dollar since November.
  • Monetary policy outlook - as reflected in QPM inflation forecasts and inflation expectations ahead of the March review.

Risks

  • Uncertainty over the SARB's decision to hold or cut rates at Thursday's meeting - this affects banks and borrowers given the connection between policy rate and the prime lending rate.
  • The central bank's recent efforts to reduce the prime rate introduce timing risk for further policy easing - relevant to the banking sector and credit markets.
  • Shifts in inflation expectations and forthcoming data (including the budget review and January inflation adjustments) create near-term uncertainty for monetary policy and currency markets.

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