What Next After Fed and SARB Hold on Interest Rates?

The United States (US) Federal Reserve and the South African Reserve Bank (SARB) have both opted to leave interest rates unchanged this week, a pause that signals confidence that inflation risks are easing and economic growth recovering.

In Washington, the Fed kept rates at between 3.50% and 3.75%, noting that “economic activity has been expanding at a solid pace” while inflation “remains somewhat elevated”. The Fed stressed that uncertainty around the economic outlook remains high and that future decisions will depend on incoming data, the evolving outlook, and the balance of risks. Importantly, two policymakers dissented in favour of a quarter-point rate cut, a sign that internal debate has begun to tilt toward easing even if the majority is not yet convinced that the time is right.

The decision to hold reflects a US economy that is still growing strongly. Consumer inflation remained steady at 2.7% in December, while the Fed’s preferred core inflation measure edged up slightly to 2.8%. Both remain above the central bank’s 2% target, justifying caution. At the same time, US GDP expanded at an annualised rate of 4.4% in the third quarter of 2025, the strongest growth since 2023, reducing the need for immediate stimulus through lower borrowing costs.

In South Africa, the SARB also chose to hold rates, keeping the repo rate unchanged at 6.75% at its first policy meeting of 2026. Inflation has shown a modest uptick in recent months, rising to 3.6% in December from 3.5% in November, bringing it closer to the upper end of the SARB’s target band. That increase, however, comes against the backdrop of a much more favourable trend. Average inflation for 2025 declined to 3.2%, down sharply from 4.4% in 2024 and below the SARB’s own forecast, marking the lowest annual average in more than two decades.

Lesetja Kganyago, the SARB governor, said: "The December print came in at 3.6%. However, we expect this was the peak, and that inflation will slow from here."

The SARB’s decision is also shaped by global considerations. With the Fed holding rates, moving ahead of global peers would risk placing unnecessary pressure on the rand. Maintaining a stable interest rate differential helps protect the currency, which in turn limits imported inflation. The rand has strengthened by 14.0% over the past 12 months, trading around below R16 to the dollar, while global fuel prices have fallen by more than 20% over the same period, further easing inflation pressures.

For both economies, the implications of this pause are broadly positive. In the US, holding rates steady supports continued growth without reigniting inflation concerns, offering households and businesses greater certainty around borrowing costs. In South Africa, a hold protects a still-fragile economic recovery by avoiding additional pressure on consumers while reinforcing currency and bond market stability.

Crucially, neither central bank is signalling the end of the easing cycle, only a pause. In the US, dissenting votes suggest that cuts are increasingly being discussed. In South Africa, expectations remain that rate cuts will resume from March, with around 50 basis points of easing likely through 2026 if inflation continues remain moderate.