What to expect for interest rate hikes in South Africa

The South African Reserve Bank looks set to keep borrowing costs on hold to assess the inflationary impact of the US-Israeli war on Iran, which has sent oil prices surging and pummeled the rand.

All 15 economists surveyed by Bloomberg expect Governor Lesetja Kganyago and his colleagues to leave the benchmark interest rate at 6.75% when their decision is announced shortly after 15:00 in the capital, Pretoria, on Thursday. Economists in a separate survey by Bloomberg expect policymakers to be undivided on the decision.

Traders are broadly aligned. Forward-rate agreements are pricing in a 24% chance of a quarter-point rate increase on Thursday.

Contracts starting after the November MPC meeting — the last of the year — are fully pricing in three 25-basis-point increases.

That marks a change from the last MPC meeting in January, when economists were forecasting multiple rate cuts this year. 

It also mirrors a shift in investor expectations on monetary policy globally, with the Iran conflict slashing hopes for rate cuts by the Federal Reserve and the European Central Bank.

Kganyago in January cited geopolitical uncertainty among the reasons for holding rates steady, with subsequent events validating the caution of South African policymakers anxious to defend the 3% inflation target that they adopted last year.

“We expect a hawkish hold, leaning into any scenarios that might prompt a pivot toward rate hikes,” said BNP Paribas economist Jeffrey Schultz, who sees a unanimous decision by the five-member monetary policy committee.

“Our base case — for now — is for a prolonged pause in the policy rate through 2026,” he said.

Oil prices have risen almost 40% since the US and Israel attacked Iran on Feb. 28, while the rand has retreated about 6% against the dollar, making it the worst performer among major currencies since the start of the conflict.

South Africa is heavily reliant on oil imports and the war has also lifted fertilizer costs, which may spill over into food inflation.

“Financial markets, which initially expected quite a short war, are now starting to factor in the possibility that it actually could be longer,” said Annabel Bishop, chief economist at Investec, who expects a hold.

“Significantly higher fuel prices will obviously give a push to inflation,” she said, while noting that a swift end to hostilities may put the central bank back on course to ease rates by 25 basis points in the second half of the year.

The South African Reserve Bank’s quarterly projection model at the January meeting showed rates ending the year around 6.3%, implying roughly two quarter-point rate cuts.

Those forecasts are likely to be significantly altered when fresh projections are released on Thursday, alongside an updated outlook for inflation which officials back then saw ending the year at 3.3%.

“With the sharp rise in oil prices and a bit of depreciation in the rand, there are substantial upside risks that the MPC cannot ignore,” said Keabetswe Mojapelo, research economist at Rand Merchant Bank.

The central bank lowered its inflation target to 3% in July – marking the first adjustment in the guide since 2000 – and the move was ratified by Finance Minister Enoch Godongwana in November.

While the Reserve Bank is unlikely to predict an overshoot of its 3% target with a 1% tolerance band, risks remain of a persistent breach should oil prices rise further and the currency endure more pressure, said Andrew Matheny, an economist at Goldman Sachs.

“The SARB would view such a breach as threatening its 3% inflation objective’s credibility,” Matheny said. “If these risks materialize, we believe the SARB would stand ready to raise rates at future MPC meetings.”

Similar risks are likely to play out across African economies, with most of the continent dependent on fuel imports. The Central Bank of Kenya, which delivered its 10th consecutive cut last month, is now seen deferring future reductions, while easing cycles in Nigeria and Egypt have also been put in doubt.