Expectations that South African monetary authorities will cut interest rates at their upcoming March meeting have been cut short as conflict in the Middle East threatens the Reserve Bank’s inflation ambitions.
The next monetary policy committee (MPC) meeting, scheduled for March 26, is likely to see the Bank revising up its inflation outlook as the price of oil, a key driver of consumer and producer prices, soars past $100 a barrel to its highest level since the early days of Russia’s invasion of Ukraine.
The previous MPC meeting had assumed an average oil price of $65 a barrel this year and over the next two years. As Iran strikes Gulf neighbours and effectively halts activity in the Strait of Hormuz, the previously predicted supply surplus now seems less plausible.
Iran has effectively blocked all oil tankers from passing through the Strait of Hormuz, through which around a fifth of global oil supply passes. Iraq, the UAE and Kuwait, three of the biggest producers in Opec, have already cut production in response.
Investec economist Lara Hodes estimated that if the oil price settles between $85 and $90 a barrel for the rest of 2026 this would drive CPI inflation above 4% year on year by the fourth quarter, falling outside of the Reserve’s 2%-4% tolerance band, introduced last year.
In the 10 days since the war started, oil prices have already rocketed more than 40%, peaking at just shy of $120 in intraday trading on Monday, the highest since mid-2022.
With uncertainty high, the Reserve Bank is likely to be cautious and delay a change in interest rates, although in the long term (out to 2028/2029) the Bank still likely remains in an interest rate cutting cycle, Hodes said.
The Bank’s repo rate is currently 6.75% after four 25 basis point cuts in 2025. The consumer price index, its preferred measure of inflation, stood at 3.5% on an annual basis in January.
Along with oil, Hodes said rising fuel prices, spurred by fertiliser and shipping costs, and a weaker rand were adding to inflationary concerns. “The risks for inflation are skewed to the upside, and food is a key component of the CPI basket,” she said.
While the prospect of sustained price shocks in oil and food markets does open the door to a rate hike, Hodes said a reversal in the Bank’s monetary policy cycle is unlikely to come next week.
“A price shock from oil, food or both would likely be looked through by the MPC if short-lived and without second-round effects flowing into other prices, leaving interest rates unchanged,” she said. “We would not expect a hike in the repo rate this month, as it is too premature to estimate oil price effects.”
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