The MPC's recent decision to raise the repo rate to 7.0% amid ongoing US-Iran tensions has sparked debates about its timing and impact on the Rand and inflation. Explore how these factors are shaping South Africa's economic landscape.
Image: File
The decision by the Reserve Bank's Monetary Policy Committee (MPC) to increase the repo rate by 25 basis points to 7.0% was widely expected.
The MPC argued in its press release that the US-Iran conflict is unlikely to be resolved quickly and used two scenarios to support its decision to hike the repo rate: “The first scenario assumes that the conflict lasts another two months or so, with oil prices averaging nearly US$100 per barrel for this period and the rand about 5% weaker against the dollar. The second, more extreme scenario has the war lasting over a year, with oil prices staying above US$100 per barrel and the rand 10% weaker”.
Based on these scenarios, the MPC, using the Reserve Bank's Quarterly Projection Model, forecast that headline inflation: "will soon accelerate to around 4%, with fuel inflation over 18% for the second quarter. Our baseline forecast then has a gradual unwinding of the shock, taking inflation back to 3% late next year.”
Given these expectations, the MPC took a conservative approach to stay ahead of the anticipated upward interest rate cycle expected in many countries and increased the repo rate sooner rather than later.
In reaction the Rand immediately started to move stronger after the meeting and appreciated more than 25 cents from R16.365/$ last Wednesday to as low as R16.17/$ before the close on Friday.
The currency is now only 25 cents weaker than the R15.97/$ level recorded the day before the Israel-US attack on Iran on 28 February.
Against the Pound the Rand moved stronger by 24 cents to trade well below R22.00/£ at R21.84/£ and is now a mere 35 cents weaker than the R21.49/£ on 28 February, whilst the Euro on Friday traded on R18.91 and is only 11 cents weaker than the R18.80/€ at the end of February 2026.
Many debates will follow over the next few weeks whether the decision of the MPC was not too early and too conservative.
The possibility of a US-Iran ceasefire and a negotiated settlement is growing by the day.
US President Donald Trump said on Friday that he was holding a White House Situation Room meeting with his advisers as he considered a final determination on moving forward with a deal to extend the Iran ceasefire.
The stronger Rand and lower oil prices contributed to the recovery in fuel prices last week.
By Thursday, the diesel over recovery had reached R5.53 per litre, while petrol showed an over recovery of 42 cents per litre.
The official fuel price adjustments will be announced on Monday, 1 June.
Finance Minister Enoch Godongwana announced last Thursday that the amount of relief from the general fuel levy will be reduced to R1.50 per liter for petrol and R1.96 per liter for diesel, effective from Wednesday 3 June 2026 to Tuesday 30 June 2026.
This implies that the price for diesel is expected to decrease by at least R3.57 a litre and the price for petrol to increase by R1.08 per litre based on the over recovery recorded last Thursday.
Given the prospects of a possible permanent ceasefire between the US and Iran and the opening of the Strait of Hormuz to allow oil tankers passage, global equity markets remain nervous, but more bullish, with limited but still some interest in shares as investors remain on the sidelines, while the gold price as safe haven on Friday became popular again.
Gold bullion shot up by $90 per ounce on Friday to close the week $48 per ounce higher.
On the JSE the ALSI ended the week 1.3% higher but for the month of May was down by -0.5%.
The Resources 10 Index improved by 3.0% last week, ending the month broadly unchanged.
The Industrial index ended last week flat, gaining 0.1% and losing a mere -0.40% over the month. The JSE precious metal index improved by 3.6% last week, whilst the FIN15 index ended flat, gaining 0.8%.
In the US, equity prices remain bullish. On Wall Street the Dow Jones industrial board gained 1.0% last week and was up by 2.7% in May and 7.0% higher over the last six months.
The S&P500 index improved last week by 1.4% and for the month was higher by 5.2% and 10.2% over the last six months.
NASDAQ increased last week by 2.4%, winning 8.4% for May and shot up by 15.4% over the last six months.
Globally, the MSCI Index in dollar terms added 1.3% last week, gained 4.3% in May and improved by 6.8% over the last six months.
This coming week all eyes will remain on negotiations between the US and Iran regarding a ceasefire and the reopening of the Strait of Hormuz.
The Rand exchange rate and the oil price are expected to continue to improve.
On Global markets investors await the release of the US non-farm payrolls on Friday.
Analysts expect the US economy to create only 96,000 new jobs in May and that the unemployment rate remains at 4.3% (0.3% higher than the Federal Reserve’s target).
This may reduce the likelihood of the Fed increasing interest rates at its next meeting.
Domestically, no major economic or market indicators are scheduled for release.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
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