The South African economy has faced significant challenges in recent years, including sluggish growth, high unemployment, and persistent corruption scandals draining the country of much needed capital input.
With the benchmark interest rate now cut to at 7% as of July 2025, following several cuts by the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) this year, there is ongoing debate about whether the SARB’s restrictive monetary policy, led by Governor Lesetja Kganyago, is stifling economic growth.
Critics argue that maintaining high interest rates limits access to affordable capital for businesses, hindering expansion, innovation, and job creation. Furthermore, the governor’s indication of lowering the inflation target from the current 3–6% range to a stricter 3% has raised concerns about its potential to exacerbate economic constraints. This analysis explores the impacts of high interest rates, evaluates the data supporting or challenging the critics’ views, and considers alternative approaches to foster meaningful economic growth.
Economic Context and Interest Rate Policy
South Africa’s economy has struggled with low growth, averaging 0.7% annually over the past decade, with 2024 recording a modest 0.6% expansion. High interest rates, currently at 7% after a 25-basis-point cut in May 2025, aim to maintain price stability within the SARB’s 3–6% inflation target range. Inflation has been well-controlled, dropping to 2.8% in April 2025 and remaining below the 4.5% midpoint of the target range, driven by lower fuel prices, a stronger rand, and weak demand pressures. Core inflation, excluding volatile items like food and fuel, stood at 3.1% in March 2025, indicating moderate underlying inflationary pressures.
The SARB’s hawkish stance, with a cumulative 4.75% rate hike since the start of the tightening cycle, reflects a focus on anchoring inflation expectations and protecting the rand’s value. However, critics argue that this approach is overly cautious, given the controlled inflation environment, and is constraining economic activity by increasing borrowing costs.
Impact of High Interest Rates on Businesses and Growth
High interest rates raise the cost of borrowing, directly affecting businesses, particularly small and medium-sized enterprises (SMEs), which are critical to South Africa’s economy, driving innovation and job creation. The repo rate, at which the SARB lends to commercial banks, influences the prime lending rate, currently at 10.75% after yesterday’s 0,25% cut. This elevated cost of credit discourages SMEs from taking loans for expansion, investment, or market development, as noted by economists like Patrick Buthelezi, who suggest that high rates limit access to affordable capital.
While the BankservAfrica Economic Transactions Index (BETI) has showed some improvement over the past two months, overall, real GDP growth for Q2 is forecast at only 0.6% quarter on quarter, seasonally adjusted, compared to a minimal 0.1% in Q1, the growth rate still remains at a snails pace and if one takes inflation into account, means that the economy is in essence shrinking.
High interest rates exacerbate these pressures by increasing debt servicing costs, reducing cash flow, and limiting reinvestment opportunities.
Economic growth forecasts for 2025 range from 0.8% to 1.3%, an improvement from 2024’s disastrous 0.6% but still below the levels needed to address unemployment rate of 32.9% in Q1 of 2025, and poverty rate of 63,5% in 2025. Critics argue that maintaining high rates risks prolonging this sluggish growth, as businesses face barriers to scaling or innovating, and consumers are likely to reduce spending due to higher debt repayments and rates on basic services such as electricity increasing.
The Inflation Target Debate
Governor Kganyago’s push for a 3% inflation target, down from the current 3–6% range, has sparked debate. Proponents argue that aligning South Africa’s target with trading partners (closer to 2–3%) could enhance trade competitiveness and stabilize the rand by reducing the need for continual currency devaluation. A lower target could also lower long-term lending rates, as suggested by some economists, potentially easing borrowing costs over time.
However, critics contend that a stricter 3% target is unnecessary given the current low inflation environment (2.8% in April 2025) and could further restrict growth. A recently published research paper, indicates that inflation negatively impacts growth in both the short and long term, but inflation uncertainty, which a lower target might reduce, only affects growth in the short term. With inflation already within the target range and core inflation at 3.1%, the need for a tighter target is questionable, especially as it may necessitate higher interest rates to achieve, further constraining credit access. A study suggests that a 2–3% target is more practical globally, but any change should be gradual to maintain credibility.
Added to this uncertainty, the high government debt-servicing costs, close to 22% of revenues, are limiting the fiscal space available for social and growth-enhancing policies, and this in conjunction with the current stubbornly high interest rate cycle is likely to be doing more harm to the economy than stabilising the local currency and economy.
Alternative Approaches
Alternative approaches to foster growth include:
- Further Rate Cuts: Economists forecast the repo rate could fall below 7% by the end of 2025, with cumulative cuts of up to 75 basis points, to stimulate investment and consumption. Lower rates would reduce borrowing costs, enabling SMEs to access cheaper capital for expansion and job creation.
- Structural Reforms: Addressing infrastructure bottlenecks, such as electricity and transport constraints, is critical. Improved power supply since March 2024 has supported modest growth, but ongoing reforms in port and railway services could boost export capacity, creating jobs.
- Support for SMEs: Diversifying funding sources, such as government grants or crowdfunding, could reduce reliance on high-cost bank loans. Embracing technology and automation can also enhance SME resilience against economic shocks.
- Balanced Inflation Targeting: Maintaining the current 3–6% target range, with a focus on the 4.5% midpoint, could provide flexibility to support growth without sacrificing price stability. A gradual transition to a lower target, if pursued, would avoid sudden policy shifts that could undermine credibility.
Time For a New Perspective?
High interest rates at 7% are constraining South Africa’s economic growth by limiting access to affordable capital, reducing consumer spending, and hampering SME expansion. While the SARB’s focus on price stability has kept inflation within the 3–6% target, the proposed 3% target risks further tightening monetary policy, potentially exacerbating economic challenges. Data shows inflation is under control at 2.8%, and core inflation is moderate at 3.1%, suggesting room for further rate cuts to stimulate growth.
“While the prospect of interest rate cuts offers a glimmer of hope, particularly given recent inflation trends, the reality for many small businesses remains tough,” says Garth Rossiter, Chief Risk Officer at SME services provider Lula.
“Our internal data has shown a significant impact on SME turnover over the past year, underscoring this persistent financial pressure. The chart below illustrates the recent divergence: inflation peaked in mid-2022 and decreased for more than two years before any downward interest rate adjustment.
“The data shows that the SARB has been proceeding more cautiously than some might hope, and this is potentially stifling growth. When you have consistently low inflation and high interest rates, it creates a real brake on growth which our economy can ill-afford.
“While we appreciate the delicate balancing act the SARB faces with global tariffs and uncertainty, and how these might impact future inflation, consumers and small businesses need stability and an enabling environment to thrive. Every policy decision – from interest rates to tariffs – has a direct impact on their ability to operate, grow and create jobs. It is all a trade off, but at the moment, the benefit of SARB taking a much bolder move on interest rate cuts to drive economic growth outweighs the short-term inflation risk,” he says.
Economists advocate for a cautiously extending the interest rate easing cycle along with structural reforms to address supply-side constraints, which could create a more conducive environment for businesses and drive meaningful economic growth in 2025 and beyond.
