Inflation is no longer expected to rise as sharply as previously anticipated in the second half of 2025, providing the Reserve Bank with further room to cut interest rates.

In the first half of the year, economists projected inflation to steadily rise to end the year slightly above the midpoint of the Reserve Bank’s 3% to 6% target range.

However, they are now shifting their expectations following consecutive months of lower-than-expected inflation readings.

FNB’s economics team now expects headline inflation to end the year below the Reserve Bank’s 4.5% midpoint.

FNB senior economist Koketso Mano revealed this at the unveiling of the bank’s annual Retirement Insights Survey.

The survey aims to analyse the retirement industry in South Africa, with a specific focus on preparedness across age and income groups, as well as analyse how South Africans save for retirement.

A significant factor in determining how much an individual can save for retirement is the current prevailing economic climate, Mano explained.

Significant increases in the cost of living over the past few years, coupled with elevated interest rates, have minimised disposable income.

Coupled with a stagnant economy, this translates into South Africans having less money to save for emergencies and retirement, with many living paycheck to paycheck.

However, there are signs that this picture is beginning to change, with inflation decreasing significantly and interest rates following suit.

Lower inflation has boosted household spending and freed up capital for increased savings and investment, boosting the local economy.

FNB projects that real household incomes will rise throughout 2025 as inflation expectations drift downward.

Mano explained that the bank expects inflation and interest rates to end the year lower than initially expected, with the Reserve Bank having greater room to cut rates in the second half of the year.

This, however, is all dependent on whether a new, lower inflation target is set for the bank, which could maintain the country’s low inflation but keep interest rates elevated for longer to ‘lock in’ a 3% inflation rate.

FNB’s projections for the remainder of 2025 are presented in the graphs below.

Best news for inflation in four years

South African inflation expectations, a key metric used by the Reserve Bank to inform its interest decisions, have steadily moderated throughout 2025.

In the second-quarter inflation expectations survey from the Bureau of Economic Research, all three social groups surveyed had their expectations decline across the forecast horizon.

On average, the respondents expect headline consumer inflation to be 3.9% during 2025, rising gradually to 4.3% in 2026 and 4.5% in 2027.

Thus, for the first time in four years, inflation expectations for the current year have fallen below 4%, indicating that there is greater room for the Reserve Bank to cut interest rates.

Headline inflation remains below the bottom-end of the Reserve Bank’s 3% to 6% target range, with the latest reading showing price increases accelerated marginally to 2.8% year-on-year.

Crucially, at its current levels, all key measures of inflation, across headline, core, goods and services, remain below the midpoint of the Reserve Bank’s target range.

These domestic factors have been coupled with easing trade tensions between the United States and China, which significantly reduces the risk of a global recession and an inflationary spike.

As a result, all the groups surveyed by the BER made a downward revision to their five-year ahead inflation expectations, expecting a rate of 4.4%.

In contrast to their view on lower consumer inflation, the survey respondents upwardly revised their forecast of wage increases during the second quarter.

They now expect salaries to rise by 4.9% this year and 5.1% next year, compared to 4.5% and 4.8% previously.

All three social groups are now more pessimistic about economic growth. On average, they expect GDP to expand by 0.9% this year, compared to 1.2% before. For 2026, they anticipate growth of 1.2%, lower than the 1.4% expected during the first quarter.