Expectations around South Africa’s interest rate outlook have shifted sharply after the Monetary Policy Committee (MPC) unexpectedly decided to keep rates unchanged, with economists now weighing the possibility of either further hikes or cuts later this year.
The decision marks a significant departure from market expectations just weeks ago, when several interest rate increases were anticipated during 2026.
The South African Reserve Bank’s decision surprised many economists, who had expected the central bank to raise rates following a rise in inflation in June.
Inflation increased to 5% in June, moving further above the Reserve Bank’s current 3% target and exceeding the expectations of several economists.
However, SARB Governor Lesetja Kganyago said the MPC’s decision was not based solely on June’s inflation figure, but on its assessment of where inflation is expected to head for the remainder of the year.
The MPC lowered its forecast for headline inflation at the end of 2026 from 4.4% to 4%, partly due to relatively subdued food price increases.
The committee also indicated that monetary policy was already restrictive enough, making another consecutive rate hike unnecessary at this stage.
Investec economist Lara Hodes said deteriorating consumer and business confidence had also become a concern.
She said economic activity had weakened since the outbreak of the conflict between the United States and Iran, adding that another rate hike could place further pressure on economic participation and weigh on an economy that has already struggled to grow.
The Reserve Bank previously increased the repo rate by 25 basis points in May amid concerns over rising global oil prices. At the time, it warned that another increase could be considered depending on developments in oil prices and weather conditions.
The potential impact of an El Niño weather pattern during summer is also a concern, with possible drought conditions threatening agricultural production.
Poor rainfall and declining dam levels could place additional pressure on food production and potentially push food inflation higher.
Despite keeping rates unchanged, the Reserve Bank has not ruled out future increases.
It said further decisions would depend on factors including the inflation outlook and fuel prices. If inflation expectations remain elevated, rates could rise again and stay higher for longer.
The central bank also warned that persistently high oil prices could result in another hike. Under a scenario where global oil prices remain around $100 a barrel and only decline significantly in 2029, additional monetary tightening could be required.
However, if oil prices fall towards $78 a barrel and continue declining, another rate increase may not be necessary.
PSG chief economist Johann Els said he expected oil prices to decline relatively quickly, pointing to historical trends following periods of sustained price increases.
“Once oil stays elevated for a while, as the Middle East conflict has caused, it often falls much faster than expected,” Els said.
The Reserve Bank is currently forecasting average global oil prices of around $82 a barrel, down from its previous assumption of $91.
Els said this could create room for interest rate cuts later in the year if inflation declines alongside lower fuel costs.
“Under this positive scenario, the Reserve Bank’s model actually brings back rate cuts later this year already,” he said.
Els also praised the MPC’s approach, describing the Reserve Bank as “clearly forward-looking”.
He said the central bank was focusing on where inflation was heading rather than reacting solely to the latest figures.
“They recognise the risks, but policy is based on where inflation is going, not where it is today,” he said.
Els added that the Reserve Bank appeared increasingly mindful of the financial pressure facing households, pointing to higher fuel costs, weakening confidence, disappointing recent economic activity data and subdued export commodity prices.
“Households are under pressure from higher fuel prices, confidence has weakened, recent activity data has disappointed, and export commodity prices remain soft,” he said.