The South African Reserve Bank (Sarb) Governor Lesetja Kganyago said the Monetary Policy Committee (MPC) decided to hike the Repurchase Rate (repo rate) by 25 basis points to 7% as a response to bring back inflation to the central bank’s target.
Consumer Price Inflation (CPI) for April increased to 4%, from 3.1% in March. The Sarb has an inflation target of 3%.
Announcing the hike on Thursday in Pretoria, Kganyago said two MPC members had favoured leaving the repo rate unchanged, while the rest voted for an increase. There were also discussions about hiking the repo rate by 50 basis points; however, they saw a 25-basis-point increase as a better fit.
Middle East War impact on repo rate
This is the first time since May 2023 that the repo rate has been hiked. The rate remained unchanged until the central bank began cutting rates in November 2024.
South Africa was hopeful that the cutting cycle would continue into 2026; however, the war in the Middle East has brought uncertainty and driven inflation higher. But Kganyago highlighted that the shocks from the Middle East war found the country’s fiscal position better prepared than in 2022, when the Russia-Ukraine war triggered similar shocks.
“This shock found us better prepared than 2022, from the domestic side,” he said.
“Firstly, after years where The National Treasury used to say the fiscal position will be better in the next 2 years or in the next 3 years, at the time the budget policy statement was presented, they said the fiscal position is better now. And we expect it to get even better.”
Inflation better than previously
Kganyago also added that the Middle East war shocks hit while inflation was on target, while in 2022, the shocks hit while inflation was above target.
“This time around, we were then on target, and we had a lower inflation target that had just been adopted, and we were on that lower target.
“Thirdly, at the time of the shock, the prices of our exports had risen faster than the prices of ours, and so we had a rise in terms of trade. This was a positive shock.”
SA is still safe
He said that the aforementioned have since adjusted as oil prices have risen, but they remain above their medium- or long-term averages. “That was an important factor to take on.”
Kganyago highlighted that hopes for a quick end to the Middle East crisis have faded. This is as the Strait of Hormuz is still largely closed. “Oil prices have fluctuated around 100 dollars per barrel,” he noted.
“In this context, global growth forecasts have been marked down, while inflation forecasts have been revised higher.
“The fundamentals of South Africa’s recovery remain intact, as reflected in the recent decision by Moody’s to assign a positive outlook to the sovereign credit rating. The macro economy is demonstrating resilience to global challenges.”
GDP outlook lowered
Kganyago said the country’s growth forecasts have been lowered for the next two years. Before the shock of the Middle East war, the economy seemed to be gaining momentum, with incoming data mostly positive.
“Now, however, we face a painful combination of higher global uncertainty and reduced disposable income,” he noted. “This will hit both investment and household consumption, which have been our main growth drivers.”
The committee agreed that inflation risks had intensified and that the challenge of large and overlapping shocks would likely trigger second-round effects, requiring a monetary policy response.
“The forecast from our Quarterly Projection Model (QPM) shows one hike this quarter,” added Kganyago. “As inflation falls later in the forecast, our model then has rates easing again, towards neutral levels.”
