The surge in oil prices triggered by the Middle East war has all but ruled out an interest rate cut when the South African Reserve Bank meets this week.
However, the outlook for monetary policy for the rest of the year remains uncertain.
Before Israel and the US launched an attack on Iran that set off the turmoil in global markets, economists were pencilling in a 25 basis point reduction in the benchmark repurchase rate, which is currently 6.75%.
In theory, the easing in annual inflation to 3% in February from 3.5% in January would have backed that argument.
In practice, the inflation outlook has deteriorated sharply, with domestic fuel prices — adjusted monthly based on international oil prices and the rand exchange rate — on track to climb a staggering R5.20, or 26%, a litre for 95-grade petrol in the economic hub of Gauteng in April, by far the biggest month-on-month jump on record. Fuel has an about 4.5%–5% weighting in the consumer price index basket.
“In the absence of the war in the Middle East, the decrease in February’s inflation rate, softer services inflation and lower inflation expectations for the first quarter of 2026 would have increased the chances of an interest rate cut in March,” Momentum Investments economists Sanisha Packirisamy and Tshiamo Masike said in a note.
“However, given that monetary policy decisions are aimed at managing future price pressures rather than immediate outcomes, the inflation risks stemming from the conflict mean the volatile environment is not conducive to an interest rate cut.
“The duration of the conflict will determine whether the impact will be transitory, therefore requiring limited (if any) monetary policy intervention, or more permanent, necessitating a stronger policy response to anchor inflation expectations.”
The uptick in inflation expectations among South African households to 5.4% from 5.3% in the Bureau for Economic Research’s (BER) first quarter survey will also weigh on members of the central bank’s monetary policy committee (MPC), as it is well above not just its 3% target, but also the one percentage point tolerance on either side of that number.
Like every other central bank in the world, the Reserve Bank will now have to weigh the likely impact of the war in Iran on inflation in the months ahead.
— Nedbank’s economics unit
“The SARB has also expressed concern about sticky services inflation and would not have welcomed the uptick in services selling price inflation, as reflected in the BER’s Other Services Survey,” said Lisette IJssel de Schepper, an economist at the Stellenbosch University-based bureau.
Apart from domestic factors, the SARB also tends to take its cue from major central banks, which all kept their rates on hold last week. Notably, the US Federal Reserve voted 11-1 to hold its benchmark federal funds rate unchanged at 3.5%-3.75% despite political pressure from President Donald Trump for a reduction.
With a decision to hold South Africa’s repo rate almost a foregone conclusion, economists will pay attention to what governor Lesetja Kganyago says about what the Bank now expects for inflation regarding its 3% target.
“Like every other central bank in the world, the Reserve Bank will now have to weigh the likely impact of the war in Iran on inflation in the months ahead. Reassuringly, the Reserve Bank already considered the upside risks from an adverse turn in global oil prices and the rand in January,” Nedbank’s economics unit said.
At the January meeting, the MPC constructed a scenario in which the price of Brent crude shoots up to $75 a barrel and the rand weakens to R18.50 against the US dollar. The central bank’s model showed that inflation would rise but remain within the one percentage point tolerance on either side of the 3% target.
“This analysis led the MPC to conclude that it would take a big shock to lift inflation above 4%. The escalating war in the Middle East could well deliver such a big shock. Our calculations suggest inflation will breach the upper 4% tolerance band, albeit temporarily,” said Nedbank.
In addition to keeping rates unchanged this week, it now looks likely that they could stay on hold for the rest of the year, with some economists not yet ruling out a possible increase towards the end of 2026.
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