Higher oil prices might not filter through to inflation as the South African Reserve Bank prepares to meet next week.
Image: Graphic: Nicola Mawson
The South African Reserve Bank (SARB) is expected to leave interest rates unchanged next week, but economists say the decision is likely to be one of the closest in months as higher oil prices and renewed conflict in the Middle East complicate an otherwise improving inflation outlook.
The Monetary Policy Committee's decision on Thursday follows the release of June consumer inflation data a day earlier. Economists expect annual inflation to edge up from 4.5% in May to between 4.6% and 4.7%, largely because of higher fuel prices.
Johann Els, chief economist at PSG, said the June inflation figure itself was unlikely to influence the committee's decision because SARB would already have finalised its own inflation forecasts before the official data is released.
However, Els said the renewed conflict in the Middle East had pushed oil prices back to about $85 a barrel, making next week's decision "a very close call" despite his base case remaining that rates will be left unchanged.
While higher oil prices, rising inflation expectations and the Reserve Bank's commitment to anchoring inflation closer to its preferred 3% target strengthen the case for another rate increase, Els said there was still little evidence that fuel costs were feeding through into broader inflation.
Wage settlements had remained largely unchanged, the rand had been relatively stable and the Reserve Bank's pre-emptive 25 basis-point increase in May had reduced the need for further tightening, he said.
That view is shared by other economists. Investec chief economist Annabel Bishop said the flare-up in the Middle East had made the July decision less clear-cut than it appeared a week ago. Investec now expects inflation of 3.7%, up from its previous 3.3%, for 2026.
Trading Economics said SARB Governor Lesetja Kganyago has maintained a hawkish stance, leaving the door open to further policy tightening should inflationary pressures persist. The central bank raised rates in May for the first time in three years.
Economists at the Bureau for Economic Research expect what they describe as a "hawkish hold". They said that although higher inflation expectations and geopolitical risks warrant caution, underlying inflationary pressures remain subdued and there is little justification for another immediate increase in interest rates.
The BER added that, while a single inflation reading would not normally sway the Monetary Policy Committee, next week's meeting appeared so finely balanced that a meaningful upside or downside surprise in Wednesday's inflation data could prove more influential than usual.
The Reserve Bank raised the repo rate by 25 basis points in May, lifting the prime lending rate to 10.5%. Beyond next week's decision, economists expect inflation to ease through the remainder of the year as the impact of higher fuel prices fades, barring a further escalation in geopolitical tensions.
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