All eyes on Reserve Bank Governor Lesetja Kganyago

All eyes are on Reserve Bank Governor Lesetja Kganyago and the Monetary Policy Committee (MPC) ahead of their interest rate decision later today.

The job of deciding South Africa’s interest rates for the next two months has become increasingly complicated over the past few weeks as forces outside of their control present competing pressures pulling in opposite directions.

While the year started hopeful, with South Africa in a cutting cycle, inflation at or near the target, and two to three more interest rate cuts priced in, these hopes have since been dimmed in light of the Iran war.

Ashburton Investments’ head of fixed income, Albert Botha, explained that when the first missile was fired at Iran on 28 February 2026, it rearranged the entire board and massively complicated the upcoming rate path.

“At the start of the year, markets were pricing in two to four rate cuts over the next 18 months,” Botha said.

“Inflation appeared firmly under control, with most forecasts converging on 3% by end-2027, and the global backdrop was broadly supportive for South Africa.” 

South Africa recorded CPI inflation of 3% for February, precisely at the new target that the Reserve Bank has been aiming for.

In theory, this would have set South Africa up for further rate cuts in the year, with many economists pencilling in a 25 basis point cut for the upcoming MPC meeting on Thursday, 26 March.

Botha said this prediction held up as recently as 25 February. However, in less than a month, “almost everything has changed as the war in Iran has upended nearly every outlook”.

He explained that the most disruptive factor to initial interest rate projections is the price and availability of energy.

The effective closure of the Strait of Hormuz since the start of the Middle East war has led to serious concerns regarding South Africa’s fuel availability and the impact potential shortages could have on prices at the pump.

At the same time, global oil prices have skyrocketed, and the rand has been weaker due to a stronger United States dollar, further raising concerns over the price motorists will pay in April, and the consequential impact on inflation.

Under pressure

Botha pointed out that these concerns over fuel inflation come as local cost pressures are also adding to an already difficult inflation environment. 

NERSA approved electricity tariff increases of 8.76% for direct customers and 9.01% for municipalities starting in April. 

“Many municipalities are also raising fixed charges, contributing to growing ‘bill shock’ among consumers,” Botha said. 

“Water tariffs are up 11% in Mangaung and 13.9% in Johannesburg, while Cape Town property rates have risen 7.96%.” 

“On the labour front, Eskom workers are currently demanding a 12% wage increase, and the minimum wage is up 5% from 1 March.”

These price increases are set to further place upward pressure on inflation in South Africa. Compounded by weaker growth forecasts due to a halt in the commodity boom, the inflation outlook appears grim.

All of these factors taking place concurrently have had a striking effect on South Africa’s interest rate outlook.

Botha said the three-month forward rate starting a year from now has moved from pricing in three cuts (6.07%) to pricing in four hikes (7.90%), a shift of over 180 basis points since 17 February.

“All of this leaves Governor Lesetja Kganyago navigating a far more treacherous environment than he faced just weeks ago,” he said. 

“On Thursday, 26 March, he will have to make a decision, but a few outcomes seem likely.” 

Firstly, Botha said the near-term inflation forecast will be revised upward, even as the projection for end-2027 likely remains close to the 3% target. 

Secondly, he pointed out that growth expectations will likely be lowered, weighed down by energy and fertiliser costs and by broader economic uncertainty. 

Lastly, interest rates will most likely be left unchanged at this meeting. Botha warned that the crisis could unwind as quickly as it escalated, and most central banks remain in “wait-and-see” mode.

“With inflation currently hovering at 3%, things are under control,” he said. “The governor, in being conservative in the last couple of meetings and pausing now, is buying himself time.” 

“However, uncertainty is the defining condition of our outlook, a hallmark of the second Trump term, and South Africa must, unfortunately, watch and absorb the consequences of events unfolding in the Middle East.”