In 2025, the South African Reserve Bank (SARB) cut the overnight interest rate by 1%, bringing it down to 6.75%. Interestingly, South Africa’s inflation rate, in fact, rose marginally through the year from 3.0% to 3.5%. This means that the inflation-adjusted overnight rate, or the rate of interest in excess of inflation, reduced from 4.75% to 3.25%. The SARB would argue that an overnight inflation-adjusted interest rate of 3.25% is still too high for its liking. The preferred target is closer to 2.5%. In turn, this implies that a further 0.75% in interest rate cuts would be needed to achieve an overnight rate of 6%.

The sharp decline in South Africa’s inflation trajectory has been a subject for lively debate among consumers. Many argue that their lived experience of price change in the last year has felt higher than a meagre 3.5% increase. Much of this has to do with which basket items of the consumer price index one is anchoring to and which components take up the largest share of household spending. While the weights attached to each item in the inflation basket might be appropriate when measured across the aggregate level of the economy’s spending, there is divergence in both spending patterns from person to person and variation in prices across basket items. Meat prices, for example, have risen 12.2% year-on-year, given the impact of foot-and-mouth disease. In contrast, the price of eggs is deflating. At the other extreme, electricity tariffs are rising at close to 13%. It is worth noting that this accounts for just 4% of direct weighting in the overall inflation basket as constructed by Statistics South Africa. Other basket items, such as telecommunications, data services and the cost of used vehicles, are deflating. Similarly, the price of new vehicles is in disinflation (i.e. currently rising at 1%, down from highs of 8% just two years ago), as new and cheaper Chinese and Indian entrants make their way into the local market.

Offshore, the consumer’s lived experience of inflation has been more pronounced than what many political incumbents can appreciate. Several socialist appointees, such as Mayor Zohran Mamdani of New York City, have won major mayoral races by campaigning on ideas like capping apartment rentals and creating government price-controlled supermarkets. As was seen in 2024’s bonfire of incumbent politicians, constituents vote with their feet when inflation bites too hard. In many ways, the inflation that households experienced in 2022 and 2023 typically occurs over a multi-year period. So when consumers were told soon after that inflation was under control in large part due to base effects it ignored the fact that they continued to grapple with the long shadow of that first price shock. This is especially true for those at the lower end of the income scale who have not experienced the resulting asset price inflation, which would have seen the value of their stock market savings increase alongside, or in excess of, supermarket price escalations.

In the last quarter, the Fund reinvested maturities at lower rates than in the third quarter, given the impact of ongoing interest rate cuts. For the year, the Fund’s yield fell from an annual effective rate of 8.67% at the start of the year to 7.59% at the close of the year (gross of fees).