Despite the South African Reserve Bank (SARB) keeping the base lending rate at 10.5% on Thursday, the Monetary Policy Committee (MPC) indicated that the future direction of interest rates remains highly uncertain.
Although the central bank's main forecast suggests that rates will remain relatively stable until inflation returns to the 3% target, the MPC also presented scenarios where borrowing costs could rise again this year or begin to fall sooner than expected.
The MPC vote concluded with a four-to-two majority in favor of maintaining rates unchanged, with two members preferring a 25 basis point hike. SARB Governor Lesetja Kganyago stated that the current policy, following a 0.25 percentage point increase in May, is 'appropriate for now,' and that future decisions will be made 'at each meeting' as economic conditions change.
The bank noted that while the inflation forecast has 'slightly improved' since the May meeting, inflation still exceeds the target level, and risks remain skewed towards increases. Overall inflation is expected to be above 4% until the start of next year, largely driven by rising fuel prices, while services inflation was described as 'problematic.' The bank also recorded an increase in inflation expectations across all groups surveyed by the Bureau of Economic Research.
Johann Els, Senior Economist at PSG, noted that the statement was noticeably less aggressive than he had anticipated, despite increased risks associated with higher oil prices and the Middle East conflict. Els emphasized that SARB views higher oil prices and the Middle East conflict as risk scenarios rather than incorporating them into its baseline forecast. Furthermore, the bank lowered its oil price assumptions and reduced its inflation forecast from 4.4% to 4% compared to the previous meeting.
However, Els also pointed out that the higher June inflation than expected leads him to forecast average inflation closer to 4.2% this year. The MPC also acknowledged that the economy has lost momentum since the last meeting due to weakening consumer and business confidence, high fuel prices, and uncertainty affecting growth.
It was noted that households have been affected by increased fuel costs, and municipal issues have become a constraint on economic activity. Christof Kruger, Head of Fixed Income Trading at Prescient Securities, believes these growth concerns played a significant role in the decision to keep rates unchanged. Kruger stated that 'the current hold is SARB's choice for growth, not orthodoxy.' He added that while textbooks would prescribe a hike at 5% inflation, SARB decided that the risk of excessive tightening outweighs the risk of expectation, given the slowdown in the second and third quarters, weak consumer confidence, and an uncontrollable supply shock.
Despite the decision to maintain rates, the Reserve Bank made it clear that further tightening remains likely. The bank modeled a scenario where inflation expectations continue to rise, leading to wage increases and core inflation, requiring another interest rate hike this year and a longer period of restrictive monetary policy. A second scenario showed that persistently high oil prices could lead to a similar outcome.
Conversely, a more favorable oil price outlook would allow inflation to return to the target level faster and create opportunities for rate cuts by the end of the year. Dr. Elna Mulman, Head of Macroeconomic Research at Standard Bank Group, noted that the central bank's message is that both outcomes remain possible. Mulman concluded: 'Therefore, it is not impossible that we will see an interest rate hike later this year, depending on how these inflation risks develop.' She also added that the Reserve Bank currently considers rates appropriate, and its model suggests the possibility of rate cuts starting late this year.
The South African Reserve Bank (SARB) is expected to keep interest rates unchanged next week, but economists believe this decision will be one of the most difficult in recent months. The difficulty stems from rising oil prices and renewed conflicts in the Middle East, which complicates the previously improving inflation outlook.
The Monetary Policy Committee's decision was made on Thursday after the release of June consumer inflation data, which came out the day before. Experts predict that annual inflation will rise slightly from 4.5% in May to between 4.6% and 4.7%, mainly due to rising fuel prices.
Joan El, chief economist at PSG, noted that the June inflation figure itself is unlikely to influence the committee's decision, as SARB has already finalized its own inflation forecasts prior to the official data release. Nevertheless, El emphasized that the resumption of conflict in the Middle East has pushed oil prices to around $85 per barrel, making the upcoming decision 'very delicate,' even if its baseline assumption of unchanged rates holds.
Despite higher oil prices, rising inflation expectations, and the Reserve Bank's drive to anchor inflation closer to the 3% target, strengthening arguments for another rate hike, El stated that there is little evidence that fuel costs are permeating broader inflation. He also mentioned that wage agreements remained largely unchanged, and the rand exchange rate was relatively stable, with the preemptive 25 basis point hike in May reducing the need for further tightening.
Other economists share a similar view. Annabel Bishop, chief economist at Investec, noted that the escalation in the Middle East has made the July decision less clear than it seemed a week ago. Investec now expects inflation to be at 3.7% compared to a previous forecast of 3.3% for 2026.
Trading Economics reports that SARB Governor Lesetja Kganyago has maintained a hawkish stance, leaving room for further policy tightening if inflationary pressures persist. The central bank raised rates in May for the first time in three years.
Economists from the Bureau for Economic Research expect a 'hawkish hold.' They believe that while geopolitical risks and elevated inflation expectations warrant caution, fundamental inflationary pressure remains moderate, and there is no sufficient basis for an immediate interest rate hike. BER added that although one inflation indicator usually does not influence the Monetary Policy Committee, the meeting next week looks so balanced that a significant unexpected surge or drop in inflation data on Wednesday could prove more influential than usual.
The Reserve Bank raised the repo rate by 25 basis points in May, bringing the prime lending rate to 10.5%. In addition to next week's decision, economists forecast a slowdown in inflation for the remainder of the year as the impact of high fuel prices wanes, provided there is no further escalation of geopolitical tensions.
