Steady interest rates strengthen agricultural investment outlook

A steady repo rate at 6.75% is good news for agri-investors. Agricultural economist Buhlebemvelo Dube argues that it keeps inflation expectations stable while giving producers breathing room amid fuel, tariff, and disease pressures.

The Monetary Policy Committee’s (MPC) decision to keep the repurchase rate steady at 6.75% should not be mistaken for policy inertia. It reflects a deliberate choice to uphold monetary credibility at a time when inflation has largely met targets, but supply-side risks remain unaddressed. Inflation averaged 3.2% in 2025, with December’s figure at 3.6%, close to the newly formalised 3% target and well within the ±1 percentage point tolerance band.

In this context, the SARB’s Quarterly Projection Model continues to characterise the policy stance as moderately restrictive, with interest rates only reaching neutral levels during 2027 under the baseline forecast. This is significant for South Africa’s agricultural sector, as the decision hinges less on the level of the repo rate than on what it indicates about the pricing of risk over the medium term.

South Africa has entered a new phase of the monetary cycle. The economy has expanded for four consecutive quarters, marking the longest uninterrupted growth period since 2018. Household consumption increased by more than 3% in 2025, compared with overall GDP growth of about 1.3%, and is expected to approach 2% over the medium term, contingent on an investment recovery.

Agriculture is therefore operating in an environment in which aggregate demand is not collapsing, and external financing conditions remain favourable.

The dynamics of food inflation

The main constraints facing the sector are no longer cyclical but increasingly structural. This is most evident in the dynamics of inflation. The MPC has explicitly emphasised food inflation, particularly meat prices, as a near-term risk, owing to trade instability, disease outbreaks such as foot-and-mouth disease, and disruptions to major supply chains.

This represents a negative supply shock with direct effects on livestock movements, slaughter patterns, export protocols, and domestic pricing. Monetary policy cannot address these disruptions. However, it can prevent them from influencing inflation expectations, in which case their long-term costs would be much greater.

The SARB’s scenario analysis clearly illustrates this trade-off. In the worst-case scenario, inflation peaks at around 4.0%, and the move towards the 3% target is delayed, postponing the transition to neutral interest rates by approximately a year. In the favourable scenario, inflation temporarily falls to 2.3%, allowing for earlier policy easing. For agriculture, understanding these paths is crucial. Investment in orchards, irrigation systems, breeding stock, packhouses, and biosecurity infrastructure occurs over long periods.

Investment in biosecurity infrastructure is particularly important, given the severe threat it poses to South African beef producers, and a long-term investment plan to fully address it is anticipated. When expectations are well anchored, real financing costs remain manageable even with relatively high nominal rates. However, if credibility is compromised, risk premia increase internally, regardless of the policy rate.

In this context, the decision to keep the repo rate steady should be welcomed and seen as more supportive of agricultural investment than an early cut would have been. By reaffirming its commitment to the inflation target, the MPC stabilises the long-term cost of capital faced by producers whose balance sheets are highly sensitive to volatility.

Global factors

The exchange-rate channel reinforces this interpretation. The bank’s improved near-term inflation forecast reflects a stronger rand and a lower oil price assumption, both of which reduce the rand cost of imported agricultural inputs, including fuel, fertiliser components, agrochemicals, machinery, and packaging. These effects provide direct cost relief across agricultural value chains. The export implications are more nuanced. For price-taking bulk commodities, a firmer currency compresses margins.

For higher-value agricultural exports, macroeconomic stability and predictable financing conditions often matter more than marginal exchange-rate movements, particularly where logistics reliability and compliance costs dominate competitiveness.

Global conditions heighten the importance of this stability, with projections of subdued global growth, elevated public debt, persistent trade fragmentation, and increasing climate-related disruptions to agricultural production and food prices.

In such an environment, export performance depends more on structural resilience, cost discipline, and policy credibility. This highlights the limits of monetary policy for agriculture. The most binding cost pressures now lie outside the interest-rate channel.

Looking ahead

Electricity tariffs remain a key risk, with the potential Nersa price correction rising from R54 billion to R76 billion, directly affecting irrigation, cold storage, and processing costs. Disease outbreaks, especially the FMD, have the potential disrupt both domestic supply and export access. Logistics inefficiencies at the Port of Cape Town also threaten to increase delivery costs, irrespective of the repo rate.

Against this backdrop, the 6.75% repo rate should be understood not as a brake on agriculture, but as a stabilising anchor. Monetary policy has largely delivered disinflation and credibility. The sector’s performance over the next phase will depend far more on progress in animal health, administered prices, logistics, and trade facilitation than on the timing of interest-rate cuts.

Despite these challenges, South Africa’s agriculture remains aggressively resilient and is likely to overcome them, particularly with strong coordination between the government and the private sector.

Buhlebemvelo Dube is an agricultural economist in trade research at the National Agricultural Marketing Council (NAMC). The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Food For Mzansi.