Renewed geopolitical tensions have once again created risks of inflation growth due to rising oil prices. Meanwhile, the stability of the South African rand and falling oil prices strengthen arguments for the South African Reserve Bank (SARB) to keep interest rates unchanged on Thursday, although persistent core inflation and rising inflation expectations continue to argue for a rate hike.
The Monetary Policy Committee (MPC) decision on Thursday is expected to be difficult, as economists are divided on whether the central bank will continue to tighten monetary policy or maintain the repo rate unchanged. SARB Governor Lesetja Kganyago previously emphasized that the exchange rate is an important part of monetary policy transmission.
This correlation became more apparent ahead of the MPC announcement on Thursday. According to Bianca Bothes, Managing Director of Citadel Global, the rand remains within its established range, but it fell by 1% compared to the previous week by Friday, holding its ground despite the impact of Middle East tensions and uncertainty in the Strait of Hormuz. Bothes noted that support comes from improving domestic fundamentals, including confidence in SARB, improved fiscal metrics, and reform momentum. Furthermore, the firm stance of SARB Governor Lesetja Kganyago allows for further tightening if inflationary pressure persists.
Mike van der Weshuizen, Portfolio Manager at CAM Asset Management, stated that falling oil prices and the rand's resilience helped reduce some of the inflationary pressure facing the Reserve Bank. He explained that one of the main arguments for maintaining the rate is that oil prices have fallen significantly since the last MPC meeting, and the rand has also shown considerable strength. Lower oil prices and a resilient rand should help mitigate some of the inflationary pressure.
Bothes pointed out that oil markets rose sharply, with Brent crude trading above $85 per barrel and heading toward a weekly increase of approximately 11%. This rise was driven by fears that escalating conflict between the US and Iran could disrupt key supply routes in the Middle East. Van der Weshuizen added that the issue lies in the resumption of the conflict and its potential impact on oil. Although Brent crude is still below SARB's oil assumptions for 2026, SARB must communicate how it views the oil price forecast and what this means for inflation.
In Van der Weshuizen's view, inflation expectations remain a concern for decision-makers. Long-term inflation expectations are currently around 4%, which is at the upper limit of SARB's new acceptable band. A stronger argument is that SARB may raise the rate in an attempt to bring these expectations down again.
The asset manager currently assesses the probability of a rate hike at nearly two-thirds, or at least a tougher tone from Kganyago. Van der Weshuizen believes the upcoming MPC meeting will likely be very tense again, and they currently see about a 60% chance of a rate hike or at least a rather hawkish tone from the Governor.
Investec Chief Economist Annabel Bishop also believes the balance has shifted towards another 25 basis point hike after higher oil prices and rising inflation expectations increased risks to the inflation outlook. Bishop stated that the risks of higher inflation have increased, including the closure of the Strait of Hormuz, and uncertainty has also grown. SARB may decide that another preemptive hike is necessary in July, given the jump in inflation expectations.
Bishop's colleague, Investec economist Lara Hodges, noted that the renewed geopolitical tensions have brought back risks of inflation growth through higher oil prices, although expected fuel price declines this month and moderate food inflation may provide some relief. Harry Scherzer, CEO of Future Forex, noted that the MPC faced a finely balanced decision where economists were split between another hike and keeping rates unchanged. Scherzer emphasized that 'the truce in the Middle East, which temporarily eased the oil shock after May, has since broken, and crude oil has risen again. However, with 7% against inflation of around 4.5%, policy is already restrictive—a real brake on the economy.'
Despite general global uncertainty, the South African rand is demonstrating resilience against the US dollar. Analysts point to several key factors supporting the local currency: falling oil prices, rising commodity prices, weakening expectations of further interest rate hikes by the US Federal Reserve, and reduced tension in the Middle East.
In recent days, the currency's exchange rate has fluctuated around R16.20 to the dollar, which is an appreciation compared to the Q2 average of R16.49. According to Investec chief economist Annabel Bishop, if this positive trend continues, the rand could test the R16.00 mark this week.
Nolan Wapenaar, Head of Fixed Income at Anchor, noted the rand's notable stability, especially considering the recent strong position of the US dollar against other major currencies, such as the euro, which trades about 4% weaker against the dollar than before the war.
Wapenaar links a significant part of the rand's stability to the improvement in South Africa's trade conditions. He explained that the drop in oil prices contributes to this improvement, and support from higher prices for gold, platinum, and coal strengthens the rand.
Nkosinathi Nsibandi, an equity analyst at Abax Investments, pointed out that weaker-than-expected job growth in the US and revisions to previous months' data have lowered concerns about the Fed needing to raise rates in the near term. This factor has been reflected in the decline of US Treasury bond yields and the overall decrease in the US Dollar Index, which benefits emerging markets.
Expectations of a slowdown or pause in interest rate hikes by the Federal Reserve support the rand, as investors are more willing to acquire higher-yielding emerging market assets, such as South African bonds, increasing demand for the local currency. Nsibandi also added that few domestic events have managed to influence the exchange rate, contributing to the recent stability.
Annabel Bishop noted that financial markets have become more optimistic following ongoing negotiations between the United States and Iran. These talks have reduced concerns about potential shipping disruptions through the Strait of Hormuz.
She stated that the improved sentiment led to decreased demand for the US dollar as a safe-haven asset. As a result of the dollar's weakened safe-haven status, the US dollar softened, allowing the rand to strengthen against it. Bishop also highlighted the rise in foreign purchases of South African bonds, which show an upward trend since mid-July amid market calming, and expects this trend to continue as interest in Middle East conflicts decreases.
A recent interest rate hike by South Africa itself has also provided support. Wapenaar noted that a less aggressive policy from the Fed will be additionally beneficial to the rand. Currently, markets are forecasting one or two more rate hikes of 25 basis points in the country by the end of the year, while expectations in the US are similar, although Bishop believes that US rate expectations may weaken due to growth challenges.
Fed Chairman Kevin Warsh demonstrated a cautious balance, signaling commitment to price stability while simultaneously reassuring markets regarding inflation. Bishop noted that he has established himself as a steady figure by refusing to rush into another rate decision, yet providing confidence in the overall outlook. Analysts agree that the rand will likely be driven by international events rather than domestic fundamentals, with upcoming Fed announcements being the next major test. Nevertheless, Bishop warned that the rand retains a tendency toward volatility, and the direction of US interest rates remains a key risk factor for the local currency.
