Interest rate pain will help South Africa in the long run

The raising of interest rates in the wake of global oil price shocks will cause pain for South Africans in the short-term, but may cushion the blow on the country’s economy in the long-term.

The South African Reserve Bank (SARB) is expected to announce a hike of interest rates at its next Monetary Policy Committee (MPC) meeting on 28 May 2026.

This is to keep inflation expectations in line with the SARB’s new inflation target of around 3%, which it set in November of last year.

Headline consumer price inflation (CPI) in South Africa reached 4% in April 2026 on the back of rising fuel prices due to the ongoing conflict in the Middle East.

SARB Governor Lesetja Kganyago has stressed that first-round shocks, such as the initial impact on oil prices and transport costs, are out of the MPC’s control.

However, he emphasised that the SARB may take early action to soften the impact of potential second-round shocks down the line.

Ninety One Portfolio Manager Adam Furlan said this is likely to come in the form of a 25 basis point hike as of the May meeting, with potential for one or two more raises in the coming months.

“What we’ve heard from the Governor at the last few public appearances he has made is that you don’t wait to see second-round effects coming through from a supply side shock,” Furlan said.

“You act early, and acting early means in the long run you actually have to go less, and you will have a smaller impact on the economy.”

Furlan explained that the SARB followed this same approach following the 2022 oil crisis caused by Russia’s invasion of Ukraine.

According to Furlan, early action during that crisis saw South Africa experience a far shallower inflation shock than other countries, and would likely do the same now.

Hiking now will keep inflation in check

The Reserve Bank’s decision to potentially hike interest rates now prevents the need for significantly more aggressive action down the line.

South Africa’s inflation is likely to accelerate even more in the coming months as the war in the Middle East is expected to continue and supply-side shocks persist as a result.

Some experts have argued that rate hikes are not the most effective solution to this problem, as they have no impact on global oil prices and supply.

In an interview with 702, Furlan countered that choosing to wait instead of hiking now would leave South Africa’s market vulnerable to significant pricing pressures in future.

“As we saw in the April CPI print, there are already some signs of inflation apart from petrol creeping into the South African consumer price basket, such as food prices and transport prices,” Furlan said.

“By not hiking, it does leave the opportunity that those prices continue to rise and become a bigger problem for the Reserve Bank later on, which would ultimately result in the requirement to hike rates a lot further.”

Furlan explained that the SARB’s aim to keep inflation expectations anchored at its 3% target is vital for influencing wage expectations and price setting in the economy.

Asked whether the SARB should reintroduce its old inflation target range of between 3% and 6%, as opposed to the flat 3%, Furlan said the current target would be better for the country going forward.

“A lower inflation in line with our trading partners is a better outcome for the economy over the long run,” Furlan said. “In the shorter run, there may be some cost to anchor expectations to 3%.”

“But over the long run, it definitely is the correct economic policy for a country who is trading with trading partners of a 3% inflation rate.”