Announcing a 25 basis point increase in the repo rate to 7%, Sarb Governor Lesetja Kganyago said the Monetary Policy Committee (MPC) was responding to growing risks posed by the prolonged Middle East conflict, higher fuel and food prices, and the possibility of second-round inflation effects.
Image: Oupa Mokoena/Independent Newspapers
The South African Reserve Bank (Sarb) has warned that further interest rate hikes may still be necessary if inflation pressures intensify.
This comes as the central bank on Thursday outlined a series of risk scenarios that could push inflation above 6% and force policymakers into additional monetary tightening.
Announcing a 25 basis point increase in the repo rate to 7%, Sarb Governor Lesetja Kganyago said the Monetary Policy Committee (MPC) was responding to growing risks posed by the prolonged Middle East conflict, higher fuel and food prices, and the possibility of second-round inflation effects.
The increase lifts the prime lending rate to 10.5%.
Kganyago said the outlook for inflation and economic growth had worsened significantly since the MPC’s previous meeting, largely due to the continuing closure of the Strait of Hormuz and the resulting spike in oil prices.
The Sarb now expects headline inflation to average 4.4% in 2026 and 3.7% next year before returning to its 3% target in 2028. Consumer inflation accelerated to 4% in April from 3.1% previously, driven mainly by fuel prices, which surged by 11.4% after declining sharply in March.
“This is one of the largest jumps in fuel inflation on record,” Kganyago said.
While the MPC acknowledged that there is not yet clear evidence of broad-based second-round inflation effects, Kganyago said policymakers were concerned that prolonged supply shocks could begin feeding into wages and inflation expectations.
The Sarb’s Quarterly Projection Model currently points to one hike in the current quarter before rates gradually ease later as inflation moderates. However, Kganyago stressed that future decisions would remain data-dependent and taken on a meeting-by-meeting basis.
The Reserve Bank also outlined three alternative scenarios it used to assess future risks, all of which pointed to higher inflation and weaker economic growth.
The first scenario examined the impact of a prolonged Middle East conflict and an extended closure of the Strait of Hormuz, resulting in higher food and oil prices as well as a weaker rand. Under that scenario, inflation would rise to around 5%, requiring two additional interest rate hikes beyond the current baseline forecast.
The second scenario incorporated the emergence of an El Niño weather pattern, which typically brings drought conditions to parts of South Africa. In this case, higher food prices would keep interest rates elevated for longer.
The third and most severe scenario combined all the risks — a prolonged Middle East crisis, El Niño-related drought conditions and stronger pass-through effects from supply shocks into consumer prices.
“The most adverse scenario puts all the risks together, causing inflation to peak above 6%, requiring three extra hikes,” Kganyago warned.
Economists said the Sarb’s decision reflected growing concern that temporary supply shocks could become entrenched in broader inflation trends.
Patrick Buthelezi, economist at Sanlam Investments, said more rate hikes may be warranted inall three scenarios.
“Overall, this could be the only hike, but clearly there are upside risks and a delayed resolution to this conflict certainly increases the risk of more hikes,” he said.
Mark Phillips, head of portfolio management and Analytics at PPS Investments, said the central bank had traditionally looked through supply-side shocks when domestic demand remained weak, but the current risks were viewed as too severe to ignore.
“Taken together, these risks increased the likelihood of second-round wage and price pressures, prompting the bank to act pre-emptively,” Phillips said.
FNB chief economist Mamello Matikinca-Ngwenya said attention would now shift to whether higher fuel and transport costs begin filtering through the broader economy.
“To curb this risk of more widespread inflation, the Sarb has opted to act proactively by raising interest rates — aiming to dampen demand and pricing power,” she said.
She added that the release of second-quarter inflation expectations data ahead of the July MPC meeting could become a critical factor in determining whether more rate hikes follow.
“Should expectations reflect the risk of a protracted shift away from the 3% target, the SARB may have to raise rates more aggressively to protect the credibility of a lower inflation regime,” Matikinca-Ngwenya said.
Nedbank managing executive for commercial, Oscar Siziba, warned that the higher rates would place additional strain on businesses already grappling with rising fuel and operating costs.
“Higher interest rates increase borrowing and debt servicing costs for businesses, placing additional strain on cash flow,” Siziba said.
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