Miyelani Holeni | Chief Adviser | Ntiyiso Consulting Group | mail me |
South Africa has entered a new phase of monetary policy. The repo rate has been cut to 6.75%. Year-on-year inflation sits at 3.6%, and the inflation target has been revised down to 3%, with a one percentage point tolerance band.
The downward revision of the inflation target was implemented to align the country with other emerging economies. According to the South African Reserve Bank, South Africa’s inflation rate was ranked 94th out of 149 emerging and developing countries with available data in 2024. These three shifts point to a future where price growth is expected to remain low for some time. This has mixed consequences for governments, municipalities, businesses and households.
Benefits of low inflation for public finances
On the one hand, a low-inflation environment can help stabilise public finances. When inflation is contained, salary pressures tend to ease. Public sector wage increases may therefore grow at a slower pace. This would help moderate the wage bill and limit pressure on the fiscus.
For a state that has faced rising compensation costs for years, this offers some relief. In the long term, a lower inflation target is expected to support stronger economic growth, which in turn increases tax revenues. Furthermore, a lower inflation target is expected to reduce debt service costs due to lower government borrowing costs.
Challenges for municipal tariffs and revenues
But the picture looks very different for municipalities and businesses – the parts of the economy that rely directly on price adjustments to sustain operations.
A lower inflation band effectively caps how much they can increase tariffs or prices. For municipalities, this is significant. Many have historically raised electricity, water, and rate tariffs at levels above inflation, sometimes into double digits.
Data suggests that administered prices, such as those for electricity and water, have increased faster than other consumer price categories and sit well above the inflation target. These increases covered rising input costs and enabled basic service delivery.
The real risk for municipalities and service delivery
If tariff growth is now held within the new inflation band, the real risk for municipalities becomes clear. Their highest costs – bulk electricity, bulk water and the wage bill – already exceed revenue in many cases. They must also buy fuel, chemicals, spares and maintenance materials from the private sector, where prices often rise faster than inflation.
If these input costs cannot be recovered through tariff adjustments, several risks emerge. Municipalities may fall behind on payments to Eskom and bulk water suppliers. Maintenance backlogs could grow, and infrastructure failures may become more frequent.
In short, service delivery could weaken further, even in municipalities currently performing well. The real risk for municipalities is that these financial pressures compound, leading to longer-term operational challenges.
Human capital pressures and municipal sustainability
There is also a human capital dimension. Critical skills shortages already affect local government. Engineers, artisans, and technical specialists have been leaving for better-paying private sector roles. If municipal salary increases are fixed at around 3% in line with low inflation, it becomes even harder to attract and retain these skills. Service delivery is ultimately powered by people, not policy. Brain drain is the real risk for municipalities that fail to offer competitive compensation and career opportunities.
The private sector faces its own version of this pressure. Businesses are also expected to keep price increases within the lower inflation band. If input costs rise faster than they can adjust selling prices, margins tighten. That slows revenue growth. Slower revenue growth translates directly into slower job creation.
With South Africa’s GDP growth projected at roughly 1.2%, the economy lacks the buffer to absorb further weakness in hiring. However, the lowering of the inflation rate and interest rates will encourage businesses to increase investment due to the lower cost of capital. This should promote job creation and spur economic growth.
Developing bankable projects
It is important to recognise that the intention behind the new inflation band is sound: to protect the value of money, anchor expectations, and support long-term stability. But stability alone does not deliver growth.
Without coordination across sectors, the economy may settle into a pattern of low inflation and low growth. This combination leaves municipalities under-resourced, businesses constrained, households struggling with poor services and the real risk for municipalities becomes more pronounced.
The way forward requires balance. When budgets are tight, municipalities must focus on projects that unlock growth, support local business activity and improve the reliability of basic services. It is imperative that municipalities develop bankable projects that qualify for funding from both public and private sources. This encourages investment, spurs economic activity, and raises revenue. This is the core of our work in local government.
In many municipalities, we step in to help rebuild financial systems, improve revenue management, stabilise service delivery functions, and design programmes that stimulate local economic activity. Further, we draft comprehensive feasibility studies to ensure the bankability of projects and sources funding for the implementation of catalytic projects. The aim is straightforward: to create practical and workable conditions for growth, enabling municipalities to serve their communities reliably and sustainably.
In conclusion
South Africa needs more than low inflation. We need growth that is strong enough to support households, businesses and municipalities. A repo rate cut is welcome, but it does not replace the structural reforms required to build local economies and sustainable municipalities.
What we are seeing now is a warning light: low inflation driven by weak growth, not by rising economic strength. Municipalities sit at the centre of this challenge. If they prepare early and strengthen their financial and operational systems, they can withstand the pressure and protect the communities they serve. This moment calls for clear thinking and decisive action. The inflation band may be tighter, but the need for capable, well-run municipalities has never been greater.
