SerpApi.Org
A resilient rand and easing oil prices have strengthened the case for the South African Reserve Bank (SARB) to leave interest rates unchanged on Thursday, although sticky core inflation and rising inflation expectations continue to argue for a rate hike.
The Monetary Policy Committee's (MPC's) Thursday decision is expected to be another close call, with economists divided over whether the central bank will tighten monetary policy again or keep the repo rate unchanged.
Reserve Bank Governor Lesetja Kganyago has previously described the exchange rate as an important part of monetary policy transmission.
“Higher rates support the exchange rate, which gives us more favourable import prices. The exchange rate channel is an important part of monetary policy transmission,” he said at the Bureau for Economic Research Annual Conference in early June.
The power of the ZAR
That relationship has come into sharper focus ahead of Thursday's MPC announcement.
According to Bianca Botes, managing director at Citadel Global, the rand remains rangebound, but is 1% lower week on week as of Friday, holding its ground despite spillover from Middle East tensions and Strait of Hormuz uncertainty.
“Support came from improved domestic fundamentals, including SARB credibility, better fiscal metrics and reform momentum. SARB Governor, Lesetja Kganyago’s hawkish stance keeps further tightening possible if inflation pressure persists,” said Botes.
Mike van der Westhuizen, portfolio manager at CAM Asset Management, said lower oil prices and the rand's resilience had helped reduce some of the inflationary pressure facing the Reserve Bank.
“One of the bigger arguments in favour of a hold is that oil prices have fallen significantly since the previous Monetary Policy Committee meeting. The rand has also been quite resilient. Lower oil and a resilient rand should help temper some of the inflation pressure,” said Van der Westhuizen.
The spanner
Botes noted that oil markets moved sharply higher, with Brent crude trading above $85 a barrel and on course for a weekly gain of roughly 11%. “The move was driven by fears that the escalating US-Iran conflict could disrupt key Middle East supply routes,” she said.
“The spanner in the works is the resumption of conflict and what that could mean for oil. Brent crude is still below the SARB’s oil assumption for 2026, but the SARB will need to communicate how it sees the oil-price outlook and what that means for inflation,” Van der Westhuizen added.
Van der Westhuizen said inflation expectations remained a concern for policymakers. “Longer-term inflation expectations are now sitting at around 4%, which is at the upper end of the SARB's new tolerance band. The more hawkish argument is that the SARB may hike to try to temper those expectations lower again,” he said.
The asset manager currently saw an almost two-third chance of a rate increase or, at the very least, a more hawkish tone from Kganyago, said Van der Westhuizen. “The upcoming MPC meeting is likely to be quite a close call again. At this stage, we see around a 60% chance of a hike, or at least a fairly hawkish tone from the Governor.”
Shifting expectations
Investec chief economist Annabel Bishop also believes the balance has shifted towards another 25-basis point increase after higher oil prices and rising inflation expectations increased the risks to the inflation outlook.
“Risks have increased for higher inflation, including the closure of the Strait of Hormuz, while uncertainty has risen too. The SARB may decide that another pre-emptive hike is necessary in July, given the jump in inflation expectations,” said Bishop.
Bishop’s colleague, Investec economist Lara Hodes, said renewed geopolitical tensions had reintroduced upside risks to inflation through higher oil prices, although lower fuel prices expected this month and subdued food inflation should provide some relief.
Harry Scherzer, chief executive of Future Forex, said the MPC faced a finely balanced decision, with economists split between another increase and leaving rates unchanged.
Scherzer said “the Middle East ceasefire that briefly eased the oil shock behind May's move has since fallen apart, with crude climbing again. Yet at 7% against inflation near 4.5%, policy is already restrictive – a genuine handbrake on the economy.”
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