Mark Phillips, Head of Portfolio Management and Analytics at PPS Investments
The SARB’s Monetary Policy Committee raised the benchmark repo rate by 25 basis points to 7.00%, in line with the view of 15 of the 22 economists surveyed by Reuters. The decision was closely split, with four members voting for an increase and two preferring to keep rates unchanged.
Headline consumer inflation rose sharply to 4.0% in April from 3.1% in March, moving close to the upper end of the central bank’s revised 3% target range. The increase was driven entirely by external supply-side shocks, most notably the late-February Middle East conflict and the subsequent blockade of the Strait of Hormuz. These developments pushed local fuel prices up by 11% in April, lifting them to their highest level in nearly four years.
Historically, the SARB has tended to look through first-round supply shocks when food inflation is contained and domestic demand remains weak. In this case, however, Governor Kganyago indicated that the combination of risks was too significant to ignore. These included the possibility of a prolonged Middle East conflict, unpredictable consumer pass-through effects, and the emerging threat of an El Niño-related drought. Taken together, these risks increased the likelihood of second-round wage and price pressures, prompting the bank to act pre-emptively.
The impact of the shock was partly offset by improvements in domestic fundamentals. South Africa’s sovereign risk premium remained contained, fiscal conditions improved, and the rand showed notable resilience. Together, these factors helped restrain imported inflation and reduced the need for a more aggressive policy response.
For now, monetary easing appears unlikely. Policy is expected to remain firmly restrictive, and any additional tightening toward the end of 2026 will depend on whether higher transport costs feed through into broader, sustained price increases across the consumer basket.
Sanisha Packirisamy, Chief Economist; and Tshiamo Masike, Economist; at Momentum Investments
The South African Reserve Bank’s (SARB’s) decision to increase the repo rate by 25 basis points to 7% can be viewed as a move to contain inflation and inflation expectations. The sharp rise in inflation to 4% in April, alongside higher services and core inflation, suggests emerging broader price pressures which the SARB reflected in higher core inflation estimates. Given the SARB’s upward revision in its 2026 headline inflation forecast to above the upper end of its 2% to 4% tolerance band and its commitment to a restrictive policy stance to return inflation to the new 3% inflation target, we maintain our view that interest rate cuts are off the table for 2026.
While fixed income markets are pricing in 75 basis points of cumulative hikes over the next 12 months, we do not expect as aggressive a tightening cycle given weak growth and the lagged effects of monetary policy, especially as inflation is still expected to moderate next year, unless further upside inflation risks materialise in prolonged war or intense El Niño scenario.
Read Momentum’s full note here.
ENDS
