More interest rate pain coming for South Africa

The Reserve Bank’s Monetary Policy Committee (MPC) is likely to raise interest rates when it meets next week to prevent inflation from becoming entrenched at a high level.

This is largely driven by the renewal of hostilities in the Middle East, which has seen the oil price surge after it fell to near pre-war levels early in July. 

Investec chief economist Annabel Bishop explained that the hike at the MPC’s meeting on 23 July will largely be precautionary. 

Bishop said that the Reserve Bank will be concerned about inflation becoming entrenched in the economy as oil prices remain elevated. 

When inflation becomes entrenched, it is far harder to bring it back to lower levels as fuel price hikes start pushing other prices, which are more sticky, higher. 

In this scenario, the MPC would have to raise rates significantly to bring inflation back to its 3% target point. Currently, inflation is sitting at 4.5%. 

Bishop does not think such a scenario is likely, with a hike in July being the last for some time before the cutting cycle resumes. 

She explained that interest rates were already hiked in May out of precaution, as the Reserve Bank believed there would be second-round effects on prices. 

Though these have not yet materialised, the Reserve Bank would rather be overly cautious now than deal with runaway inflation later. 

Another precautionary hike is likely at the 23 July MPC meeting as oil prices have surged following the resumption of conflict in the Middle East. 

Bishop said that the main factor in whether interest rates are hiked again is the international oil price and geopolitical tensions. 

If oil prices continued their decline from the beginning of July towards $70 per barrel, then a rate hike would be unlikely and unnecessary. 

However, if they remain elevated, then the Reserve Bank is likely to hike interest rates by another 25 basis points in July. 

“Given the latest flare-up in the Middle East, the Reserve Bank may well hike interest rates again,” Bishop explained. 

The oil price has surged over the past week to reach $84 per barrel, making an interest hike almost a guarantee as fuel prices will remain high. 

Tables are turning

Rising inflation and elevated interest rates are bad news for South African consumers, as it eats away at their disposable income. 

Local consumers entered 2026 flush with cash as inflation and interest rates were falling, while access to retirement savings under the two-pot system filled their pockets. 

This translated into higher consumer spending, which is a major driver of economic growth in South Africa and led to widespread optimism for the year ahead. 

However, the first half of the year has dashed this hope, with the picture fundamentally changing amid the war in the Middle East. 

Bishop noted that South African consumers have benefited immensely from the Reserve Bank’s interest rate-cutting cycle over the past few years. 

This has not fully come to an end yet, with the interest rate hike in May being relatively modest and not having a major impact on consumers as yet. 

A hike in July will begin to add to the pressure consumers are feeling, with rising fuel prices also eroding disposable income and spending. 

Bishop said that the full effect of interest rate hikes typically takes six to twelve months to have an effect on consumers. 

While her base case is not a sustained series of hikes, further increases to interest rates will see consumers cut back on spending. 

This will slow economic growth and have significant implications for company earnings and the state’s finances, which are gradually improving. 

Bishop noted that positive macroeconomic factors, such as the state’s finances, continued fiscal consolidation, and a stronger investor climate, will make the Reserve Bank more comfortable. 

Over the long run, she expects the Reserve Bank to return to its rate-cutting cycle as inflation comes down towards its 3% target point.

“We may get another one in July, but it’s not expected to be persistent. That will, of course, then have a more serious impact on consumers,” Bishop said. 

 “We anticipate returning to the lower inflation target, and that in itself helps consumers from a real income expenditure perspective.”