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.
Monetary Policy Committee Decision
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.
Rand Strength and Supporting Factors
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.
Factors of Concern
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.
Shifting Market Expectations
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.'
