Economists predict the South African Reserve Bank (Sarb) will lift interest rates at its Monetary Policy Committee (MPC) this week as inflation starts ticking up and following a decision by the US Fed to raise rates.
"I believe we can expect a similar decision in South Africa next week when the MPC meets. This view is irrespective of the US decision and is based on the same underlying factors. Our inflation trend is also moving upward, with key cost drivers, particularly petroleum prices and transport costs, placing pressure on prices across the economy," said Frank Blackmore, Lead Economist at KPMG.
The US's Federal Reserve's (Fed) FOMC increased the interest rate in the United States (US) for the first time since July 2023 this past week, despite President Donald Trump's call to the Fed Chair Kevin Warsh to lower the rate.
Financial markets responded accordingly as the US dollar strengthened, with the Dollar Index moving above the 100 level, while gold prices retreated from above $4,360 an ounce to around $4,250 an ounce on Thursday.
The rand also came under pressure on Thursday following the Fed announcement, with US dollar trading around R16.39 on the day and R16.26 on Friday, compared with approximately R16.10 at the end of the previous week.
Dr Lerato Ntuli, economist at Anchor Capital said: "A stronger dollar, combined with elevated oil prices and softer, precious metal prices, creates a challenging backdrop for the rand. A weaker rand raises the cost of imported goods, particularly fuel, and could amplify domestic inflation pressures."
At its July meeting, Sarb's MPC opted to keep rates unchanged, although the decision was not unanimous, with two members voting for an increase.
"At the time, Sarb cited an improved inflation outlook. Headline inflation slowed from 5.0% in June to 4.3% in July, driven largely by lower fuel prices, with petrol and diesel prices declining sharply during the month. The inflation backdrop has changed materially since then," Ntuli said.
August inflation data will be released by Stats SA on September 23, with the South African Reserve Bank's (Sarb) Monetary Policy Committee (MPC) set to announce its interest rate decision later that day in the afternoon.
The key concern remains the sharp increase in oil prices, with Brent crude trading around $107 a barrel. In July the average Brent crude oil price was around $83.6 per barrel.
She pointed to oil prices rising significantly above the Sarb’s July assumption of roughly $90 a barrel with Brent currently trading above $100 a barrel, as Middle East tensions persist.
"As a result, the July disinflation driven by lower fuel costs is likely to reverse. Headline inflation is therefore expected to accelerate through the fourth quarter of 2026, as higher fuel prices feed into fuel and transport prices. Core inflation also remains elevated. Core CPI rose to 4.2% in July from 4.1% in June, above the Sarb’s tolerance band and highlighting persistent underlying price pressures," Ntuli said.
She said the ongoing Middle East conflict and elevated oil prices also raises the likelihood of second-round inflation effects, particularly through higher transport, logistics and food costs. Should these pressures become embedded in broader inflation dynamics, core inflation is likely to remain sticky or accelerate further, "reducing the scope for the Sarb to remain on hold."
She said that the Fed’s decision also has important implications for South African monetary policy.
"The interest-rate differential between South Africa and the US has narrowed considerably. With the Sarb repo rate at 7% and the Fed funds rate now at 4%, the spread has compressed to 300 bps. Should the Fed deliver another 25 bps increase later this year, that differential would narrow further to 275 bps. A narrowing interest-rate differential, combined with a stronger dollar and rising oil prices, increases the risk of sustained rand weakness," Ntuli said.
Against this backdrop, she expected the Sarb to raise the repo rate by 25 bps at its upcoming MPC meeting.
"While weak domestic economic growth remains a key consideration, the balance of risks facing the Sarb has shifted towards inflation rather than activity. Rising oil prices, sticky core inflation, a weaker rand, and a more hawkish Fed collectively strengthen the case for a precautionary tightening move."
Responding to the US Fed decision, Blackmore said: "We are seeing a similar pattern in South Africa, with inflation and expectations that inflation will increase again for August. This move indicates that the Fed is serious about restoring price stability in the US and keeping inflation under control. It also brings the divergent views of policymakers and the market back into closer alignment, which is important.".
He said that while policymakers had maintained their stance, markets had been pricing in further interest rate increases, and the US rate decision on Thursday was a step towards closing that gap.
"We can see this not only in the headline inflation figure but, more importantly, in core inflation, which has been edging higher month by month. This suggests that action is needed. My expectation is that the Sarb will increase rates by 25 bps next week. If current conditions persist, particularly elevated transport costs and ongoing instability in the Middle East, this could be followed by a further 25 bps increase at the November meeting," Blackmore said.
Ntuli said the 25 basis point (bps) hike in the US was widely anticipated. The move had raised the Fed's funds target range to 3.75%-4%, with a unanimous 12-0 vote.
"The move marks the Fed’s first increase since July 2023. It confirms that policymakers remain focused on achieving a “timelier” return of inflation to their 2% target despite signs of moderation in underlying price pressures. The Fed’s projections also retained a hawkish bias, with 16 of 18 officials indicating that at least one further rate increase may be required this year. At the same time, four policymakers see the possibility of two additional hikes," Ntuli said.
She added that the Fed removed its earlier reference that elevated inflation was partly driven by supply-side factors such as energy prices, reflecting the view that inflation is persistent rather than a temporary supply shock.
At the same time, the unemployment rate forecast was revised lower to 4.1% in both 2026 and 2027, from 4.3% previously, indicating that policymakers continue to view the labour market as resilient," Ntuli said.
ashley.lechman@nationalmg.co.za