Bad news for interest rate cuts in South Africa this month
The South African Reserve Bank (SARB) is now expected to keep rates on hold this month following violence in the Middle East, with oil prices already spiking.
The SARB’s Monetary Policy Committee (MPC) meets at the end of the month to decide on interest rates.
At the start of the year, the MPC was widely expected to cut interest rates in March and September 2026. This was based on the assumption that inflation would remain around 3%.
However, Israel and America’s attacks on Iran this last week placed massive fears on global oil and food prices.
Investec Chief Economist Annabel Bishop said that if oil prices run between US$85/bbl and US$90/bbl for the remainder of this year, CPI would reach above 4.0%.
This would exceed the SARB’s new 2% to 4% inflation tolerance band and delay a change in interest rates.
Bishop said the rand is 2.5% weaker on a trade-weighted basis, while shipping costs have risen, pushing up fertiliser and oil prices.
This has now led to concerns about a global food price shock, which would only intensify inflationary pressures.
“The risks for inflation are skewed to the upside, and food is a key component of the CPI basket,” said Bishop.
“Supply constraints for oil shipping are the main drivers of higher oil prices, despite production increases.”
She noted that the SARB is likely to revise up its inflation rate forecasts at this month’s MPC if recently higher oil prices and rand weakness persist.
The latest MPC meeting showed an oil price assumption of US$65/bbl for this year and the next two.
“A price shock, from oil, food or both, would likely be looked through by the MPC if short-lived, and without second-round effects flowing into other prices, leaving interest rates unchanged,” said Bishop.
“That is, the MPC will watch to see if the impact of higher oil prices on inflation is temporary, or is embedded, changing interest rates to prevent a more permanent move away from the 3.0% y/y inflation target.”
With uncertainty easing, financial markets have become risk-off, and oil prices have risen above US$85/bbl.
We would not expect such a large hike in the repo rate this month, as it is too early to estimate the effects of oil prices.
Despite the risk in the upcoming meeting, the SARB is still expected to cut interest rates by 25 basis points in 2026, taking it to 6.5%.
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