Reserve Bank hits pause on South Africa’s interest rate cuts

The Reserve Bank’s Monetary Policy Committee (MPC) has voted to keep South Africa’s interest rates unchanged amid heightened uncertainty surrounding the Middle East conflict.

This conflict has led to soaring global oil prices and a weaker rand, raising inflationary concerns for South Africa in the coming months.

The MPC met on Thursday, 26 March, to deliberate on South Africa’s monetary policy and ultimately voted unanimously to keep rates where they are.

This means the repo rate will remain at 6.75% and the prime lending rate at 10.25% until the MPC’s next meeting on 28 May.

In announcing this decision, Reserve Bank Governor Lesetja Kganyago explained that the ongoing Middle East conflict is a clear instance of a supply shock, which raises prices while weakening demand.

“The standard response to a supply shock is to look through first-round effects, which are unavoidable and cannot be stopped by interest rate changes,” Kganyago said.

“At the same time, central banks should be alert to second-round effects, where an initial shock triggers broad price increases.”

“Getting policy right means ensuring that the price response to supply shocks is transitory, and not persistent.”

“The fact is, we are still only a few weeks into this crisis. The coming months will be crucial for assessing the longer-term inflation consequences.”

However, the governor said that, given current forecasts, the MPC sees inflation risks to the upside.

“In previous meetings, we warned of elevated risks, and we have been proceeding cautiously in our rate setting,” he said. “Now a crisis has hit, this prudent approach is proving appropriate.”

He also warned that the latest forecasts from the Reserve Bank’s Quarterly Projection Model show rates unchanged for a longer period, postponing the cuts from its January projections.

The graph below shows South Africa’s inflation and interest rate movements from January 2021 to today.

Middle East risks

This decision comes despite South Africa’s most recent inflation print for February showing CPI and core inflation at exactly the Reserve Bank’s target of 3%.

However, the Reserve Bank has repeatedly said it does not base its decisions solely on the latest inflation outcome, with various factors taken into account, and this latest meeting was heavily focused on the ongoing Middle East conflict and its economic implications.

Prior to the outbreak of the US/Israel war against Iran, many economists were hoping for another interest rate cut in March, as the MPC had also kept rates unchanged in January.

Economists broadly expected two to three more rate cuts for 2026, with at least one in the first half of the year.

However, the cumulative effect of heightened uncertainty, high global oil prices, and a weaker rand, as well as their potential impact on inflation, dashed these hopes.

While many still expect some interest rate cuts this year, these are now more likely to come in the second half of the year, and will remain highly dependent on developments in the Middle East and the duration of the conflict.

Experts like Investec chief economist Annabel Bishop have warned about the potential inflationary impact of the conflict in the coming months, with fuel prices set to rise significantly in April.

This is due to a combination of a weaker rand trading at above R17/USD, high global oil prices, with the Brent crude oil price currently higher than $100 a barrel, and fuel tax hikes set to take effect at the start of next month.

Concerningly, higher fuel prices could also have a knock-on effect on other prices, as diesel is a key economic input in South Africa, and the country is heavily reliant on imports for fuel.

Therefore, higher fuel prices could lead to higher food prices, particularly as fertiliser costs are also expected to rise due to the Middle East conflict, putting even more pressure on local farmers contending with a major diesel price increase.

Kganyago issued a similar warning in announcing the MPC’s latest decision, saying higher energy prices will raise inflation in the near term.

“We expect headline will soon accelerate to around 4%, with fuel inflation over 18% for the second quarter,” he said. “Our baseline forecast then has a gradual unwinding of the shock, taking inflation back to 3% late next year.”

However, he said the MPC’s economic growth projections remain largely unchanged, for the time being.

“We have been encouraged by green shoots such as rising confidence and stronger investment, but the ongoing war could interrupt the growth recovery,” he said.

“There have been data revisions which lowered 2025 growth, making 2026 look a bit stronger in comparison.”

“This offsets some of the impact from the current shock. We still have growth rising to around 2% over the next few years, but we now see downside risks to the outlook.”