Bad news about interest rates in South Africa

South Africa’s two-year inflation expectations climbed, complicating the central bank’s efforts to anchor expectations around its 3% target. 

Average inflation expectations two years ahead, the measure the central bank closely watches when setting interest rates, rose to 3.9% in the second quarter from 3.6% previously, according to a survey published by the Stellenbosch-based Bureau for Economic Research on Tuesday.

The survey was conducted between May 18 and June 4, before the US-Iran 60-day ceasefire deal reopened the Strait of Hormuz, sending global energy costs lower and triggering a decline in local fuel prices, which should see inflation ease in the coming months. 

Between survey rounds, annual inflation accelerated to 4.5% from 3%, and gasoline prices hit a record.

South African Reserve Bank Governor Lesetja Kganyago recently warned that policymakers would need to act on rising inflation expectations to prevent the impact of the oil shock from fanning broader price pressures.

“We now have inflation expectations, and expectations have drifted away from target,” he told broadcaster CNBC Africa.

“And what we have seen is that all price setters are expecting inflation to be higher, and that is what the central bank has got to act on, reining in those expectations.”

Policymakers, who raised interest rates by 25 basis points to 7% at their last meeting, will deliver their next policy decision on July 23.