The South African Reserve Bank (Sarb) has adopted a more hawkish stance on inflation after raising the repo rate by 25 basis points (bps) to 7.25% this week, with economists warning that a prolonged global supply shock could keep interest rates higher for longer.
The unanimous decision by the Monetary Policy Committee (MPC) marks the second rate increase this year and comes as geopolitical tensions, higher oil prices and persistent services inflation complicate the inflation outlook.
The Reserve Bank has raised its inflation forecast to 4.4% for 2026 and 4% for 2027, while continuing to view the risks to the inflation outlook as tilted to the upside.
Patrick Buthelezi, economist at Sanlam Investments, said the global inflation environment remained challenging, with geopolitical developments including the conflict in the Middle East and the Russia Ukraine war adding to price pressures.
Major central banks have also responded to renewed inflation concerns. The Federal Reserve in the United States, the European Central Bank and the Bank of Japan have all moved towards tighter monetary policy.
Buthelezi said the key domestic concern was increasingly persistent services inflation, which rose to 5.1% in August.
“Services inflation tends to influence wages and inflation expectations. Although the latest inflation expectations eased, they are still above the target of 3%,” Buthelezi said.
He said the Sarb was therefore maintaining a restrictive monetary policy stance to limit the risk of second round inflation effects.
“Overall, based on our inflation forecast, policy is likely to remain higher for longer,” Buthelezi said.
Global shock drives Sarb caution
Johann Els, chief economist at PSG Financial Services, said the unanimous decision was more hawkish than he had expected.
“I expected the decision to be close, with a strong case for a rate hike. However, the fact that it was unanimous was more hawkish than I expected,” Els said.
He said the Reserve Bank appeared concerned that the sustained global supply shock could eventually influence inflation expectations and prevent inflation from returning to the 3% target.
“It is clear that there were enough arguments to keep rates unchanged. But it seems the concern that the shock has been sustained for so long, and could therefore push up inflation expectations, was the overriding factor,” Els said.
Els said the decision did not appear to have been driven primarily by the recent rate increases by other central banks. Instead, the greater concern was the potential for persistent supply pressures to become embedded in inflation expectations.
The Sarb itself said the global environment had become more difficult, with disruptions to oil and food supply chains adding to inflationary pressure. The European Central Bank, Bank of Japan and US Federal Reserve have also raised rates.
The Sarb has also acknowledged that South Africa's growth outlook has weakened. The economy contracted in the second quarter, while the central bank has revised its 2026 growth forecast slightly lower to 1.2%.
Despite this, Els believes the latest increase could be the last under current conditions.
“For my own outlook, I think the fact that they hiked in May and have now hiked again in September, while acknowledging that monetary policy is already restrictive, means that there should be no further rate increases under current circumstances,” he said.
Els also believes that the impact of higher oil prices could eventually reverse.
“Supply side price shocks are initially inflationary, but they are ultimately deflationary for demand and growth,” he said.
Should the Middle East conflict ease and oil prices fall sharply, he believes inflation could improve more quickly than currently expected, potentially allowing rate cuts to come sooner.
Inflation remains contained, but risks are rising
Despite the more cautious outlook, domestic inflation remains relatively contained.
Annual consumer inflation increased to 4.4% in August from 4.3% in July, while core inflation, which excludes food and fuel prices, eased to 4.1%.
The Reserve Bank said food inflation was at its lowest level since 2010 and that a resilient rand had helped contain import prices. Services inflation, however, remained elevated.
Rhys Dyer, CEO of the ooba Group, said the domestic inflation picture provided some reassurance despite the external risks.
“Inflation remains fairly well contained for now and continues to move broadly in the right direction, offering some relief for households even as global price risks persist,” Dyer said.
He said the latest increase needed to be viewed against the broader interest rate cycle.
“While any increase in borrowing costs are disappointing for consumers and the property market at large, it is important to view today’s decision in context,” Dyer said.
Dyer noted that, apart from the May increase, South Africa had experienced a relatively stable lending environment since the previous rate increase in May 2023.
However, renewed pressure from global oil prices could complicate the picture. Brent crude has been moving towards $110 a barrel amid renewed tensions involving the United States and Iran, raising concerns about further fuel price increases.
Dyer said the Sarb was facing a difficult balancing act between weak domestic growth and external inflationary pressures.
For the property market, he said competitive lending conditions could help soften some of the impact of the rate increase.
“In August, we saw a near record average interest rate of 0.75% below prime, compared with an average of 0.64% below prime from January to July 2026,” Dyer said.
He added that banks continued to show a strong appetite for home loan business, supporting higher approval rates, competitive lending rates and lower deposit requirements.
Risk of second round inflation
KPMG lead economist Frank Blackmore said the geopolitical tensions and resulting energy supply shocks were important factors behind the Sarb's decision.
He warned that the initial increase in fuel and energy costs could eventually feed into wages and broader inflation.
“The supply shocks will be responsible for second round effects, meaning, besides the direct effect of an increase in prices, it starts to enter labour markets through inflation and that becomes more persistent,” Blackmore said.
He said inflation expectations remained above the Sarb's target, making them an important consideration for monetary policy.
“The best way to contain inflation is to change inflation expectations which are still noticeably higher than the bank's target rate,” Blackmore said.
Blackmore said the latest increase was intended to reduce the risk of second round inflation becoming entrenched and to support confidence in the rand.
The Reserve Bank has acknowledged the trade-off: global supply shocks are weakening South Africa's growth outlook even as they push inflation higher. Its latest projection puts 2026 growth at 1.2%, while inflation is expected to remain above 5% later this year and early next year before returning towards the 3% target by the end of 2027.
ashley.lechman@nationalmg.co.za