Top economist expects more interest rate pain for South Africa

Investec chief economist Annabel Bishop said there is a meaningful chance that South Africa will see another interest rate hike in July.

This comes after the Reserve Bank’s Monetary Policy Committee (MPC) voted to hike interest rates by 25 basis points at its May meeting, bringing the policy rate to 7%.

However, there is some good news, as the MPC’s forecast points to a potential interest rate cut in November, which should bring some relief to South African consumers.

Commenting on the MPC’s decision to hike rates, Bishop explained that it was pre-emptive, as there is no evidence of any feed-through effects from higher inflation into higher salary and wage demands yet.

Prior to its May meeting, the South African Reserve Bank (SARB) emphasised that it would only react to second-round effects flowing from the Middle East war, rather than responding to first-round effects.

She explained that inflation expectations over a two- to three-year period are key for the SARB, with one-year expectations driven by current events, such as higher fuel prices and other higher costs.

However, in the longer term, the Reserve Bank is more concerned about higher inflation expectations.

Reserve Bank Governor Lesetja Kganyago explained in his May MPC Statement that the committee agreed that inflation risks had intensified.

He said the MPC believes the challenge of large and overlapping shocks would likely trigger second-round effects, requiring a monetary policy response. 

“Our decision was aimed at managing risks and ensuring that inflation returns to target,” the governor explained.

The Reserve Bank’s forecast now sees headline inflation averaging 4.4% in 2026, and 3.7% in 2027, before returning to its new 3% target in 2028.

“These projections entail some second-round effects, as the shock broadens out into wages and inflation expectations,” Kganyago said. 

“At this early stage, we do not have clear confirmation of these effects in the data.”

Bishop pointed out that the MPC, while eventually settling on a 25 basis point hike, considered a 50 basis point hike.

The committee also discussed front-loading interest rate hikes, “given the quicker they are delivered, the greater the impact they have on lowering inflation”.

Based on this, Bishop said there is a meaningful chance of another hike at the MPC’s next meeting on 23 July 2026.

Jumping the gun

NWU Business School Professor Raymond Parsons explained that, while the MPC decided to hike interest rates as a preventative step against future inflation, this may not have been the best decision.

“The MPC majority view therefore seems to have already conflated the visible ‘first-round’ inflation effects with possible ‘second-round’ ones later in order to justify its immediate decision,” Parsons said.

“However, the minority MPC view believing that the timing was not yet right for a rise in rates is convincing, and that credible reasons exist for such a stance.”

According to Parsons, South Africa has some economic buffers and policy space to allow time for monetary policy to navigate the highly uncertain economic outlook.

He said it would have been possible for the MPC statement to take a hawkish tone about likely higher for longer interest rates prospects, while still keeping borrowing costs unchanged.

“This would have made the MPC majority view appear less of an outlier compared to most other central banks who, like the SARB, enjoy high credibility, and have overwhelmingly decided to ‘wait and see’,” Parsons said.

However, the MPC has now pulled the trigger, and borrowing costs for business and consumers will rise.

Parsons said this hike is being implemented in what is already a weak growth environment, with South Africa’s GDP growth projections being generally cut, including by the MPC.

In the May MPC Statement, Kganyago announced that the committee had lowered its forecast for South Africa’s growth for the next two years.

The MPC now sees downside risks to growth, as higher global uncertainty and reduced disposable income will hit South Africa’s two main growth drivers – investment and household consumption.