Reserve Bank hikes interest rates in South Africa
The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) has voted to raise interest rates by 25 basis points.
This raises the country’s repo rate to 7.25%, with the prime rate rising to 10.75%. The six-person committee voted unanimously.
According to Reserve Bank governor Lesetja Kganyago, while global growth has managed to weather the storms created by the energy shocks of 2026, the cracks are showing.
For South Africa, it is clear that the energy crisis is hitting growth, he said.
“Shocks are multiplying, and vulnerabilities are increasing. The global economy is not in a healthy space,” he said.
“In our last meeting we warned of downside risks to growth. The data has now shown that the economy contracted in the second quarter, by 0.2%.”
While growth is under pressure, the SARB still expects a rebound during the second half of the year, with annual growth projected at 1.2%, and 2% over the medium term.
However, growth risks are skewed to the downside.
The central bank is raising its inflation expectations, driven by fuel prices. Petrol is rising again after moderating between June and August, with an average under-recovery of R2.83 per litre, currently.
“Headline inflation will likely be above 5% later this year and early next year, before slowing as the fuel shock recedes. We currently expect inflation to be back around 3% towards the end of 2027,” Kganyago said.
In contrast to fuel, developments in inflation for food and core goods have been more favourable.
“Import prices remain contained, with help from the rand, which has been notably resilient throughout the year. Meanwhile, food inflation is at its lowest since 2010,” he said.
“This reflects strong harvests, as well as a levelling off in meat prices following the outbreak of foot-and-mouth disease. We may start to see drought pressures from El Niño soon, but for now agricultural conditions are broadly favourable.”
The bank’s decision is in line with market expectations.
Ahead of the meeting, economists and analysts widely expected the SARB to hike rates by 25 basis points, with only a few assessing room for a hold.
Those hoping for a hold were banking on the SARB looking through the inflation shock caused by external factors, such as energy prices.
Kganyago said that the MPC’s approach was to look through the initial effects of price shocks, while ensuring that they do not entrench higher inflation.
“Unfortunately, large and sustained shocks, like those we are experiencing now, are more likely to trigger second-round effects, where individual price changes evolve into widespread increases,” he said.
To prevent this, the bank is adopting a more restrictive monetary policy, with rates above longer-term levels.
Looking ahead, Kganyago said that the forecast from the SARB’s Quarterly Projection Model (QPM) has the policy rate broadly stable through the remainder of the year.
The model shows cuts later in the forecast period, as inflation falls to 3% and the QPM moves toward a more neutral policy stance.
“As before, this rate path remains a broad policy guide. Our decisions will continue to be taken on a meeting-by-meeting basis, with careful attention to the outlook, data outcomes, and the balance of risks to the forecast,” the governor said.
The SARB’s next MPC meeting, and final for the year, will be held in November.
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