Governor of the South African Reserve Bank, Lesetja Kganyago. The Sarb's Monetary Policy Committee (MPC) will announce its monetary policy decision on Thursday after inflation rose to a 2-year high in June.
Image: Oupa Mokoena/Independent Newspapers
The surprise jump in inflation to a two-year high has intensified pressure on the South African Reserve Bank (Sarb) ahead of its closely watched Monetary Policy Committee (MPC) meeting on Thursday.
Economists are increasingly expecting policymakers to prioritise containing inflation despite mounting risks to economic growth, and adjust the benchmark policy rate after the Sarb increased by 25 basis points to 7% in May.
Statistics South Africa (Stats SA) on Wednesday reported that annual consumer inflation accelerated to 5% in June, up from 4.5% in May and above market expectations of 4.7%.
The reading marked the fourth consecutive monthly increase and the highest inflation rate since June 2024, when inflation reached 5.1%.
The acceleration was largely driven by soaring fuel prices following higher global oil prices linked to the conflict involving Iran, pushing transport inflation sharply higher and reinforcing expectations that the central bank could raise interest rates again.
On a monthly basis, consumer prices increased by 0.7%, matching May's increase.
Transport was the largest contributor to inflation, with annual price growth in the category accelerating to 12.7% from 9.4% in May. Fuel prices increased 34.3% over the past year, with diesel prices surging 50.8% and petrol rising 31.7%, reflecting elevated international oil prices.
The increase in fuel costs quickly spilled over into public transport. Passenger transport inflation jumped to 12.5% annually from 4% in May after monthly fare increases of 11.5% for minibus taxis, 8.7% for e-hailing services, 8.4% for long-distance buses and 3.7% for school transport.
Housing and utilities also added to inflationary pressure, with annual inflation reaching 5.5% as water supply costs rose 6.9% and electricity, gas and other fuels increased 3.9%.
Meanwhile, core inflation, which excludes food, fuel and energy prices, accelerated to 4.1%, its highest level since September 2024, suggesting underlying price pressures are becoming more entrenched.
The latest inflation figures have sharpened the policy dilemma facing the Sarb.
Standard Bank Group head of South Africa macroeconomic research, Dr Elna Moolman, said inflation remains well above the Reserve Bank's preferred 3% target, even though the recent increase has been driven largely by external energy shocks.
Moolman noted that the Sarb has already been more aggressive than many of its global counterparts by tightening monetary policy following the outbreak of the Iran conflict.
"At the same time, the Reserve Bank is one of the few central banks globally that have already hiked since the outbreak of the Iran war and South Africa's interest rates are already reasonably high," she said.
"If the Reserve Bank hikes interest rates further, we'd expect this to be the end of the hiking cycle and we still think that once the war is over and oil prices significantly and sustainably lower, the Reserve Bank could start unwinding these interest rate hikes and cut towards a policy rate of 6%."
Nedbank economists Johannes (Matimba) Khosa and Nicky Weimar also expect the MPC to raise the repo rate by 25 basis points, warning that geopolitical developments have significantly increased upside risks to inflation.
They said the collapse of the US-Iran ceasefire two weeks ago has once again disrupted shipping through the Strait of Hormuz, driving Brent crude oil prices from around $72 a barrel on 7 July to about $93 a barrel, increasing the likelihood of further fuel price increases.
"We forecast headline inflation to end the year at around 3.6% and to average 3.7% in 2026. However, risks to the inflation outlook remain tilted to the upside, primarily due to uncertainty surrounding the US-Iran conflict," they said.
"In particular, further disruption or potential closure of the Strait of Hormuz could intensify oil shortages and trigger a sharp increase in global oil prices, leading to a renewed moderate increase in domestic fuel prices."
Meanwhile, FNB economist Ame Muller said their updated model suggests that headline inflation will slow to 4.4% in July, with a 0.5% month-on-month increase driven mainly by higher utility and electricity costs, while remaining contained in most of the other categories.
"Encouragingly, oil prices have retreated from their recent highs, reducing some immediate pressure. Nevertheless, geopolitical uncertainty remains elevated, and the Sarb is unlikely to place much weight on what may prove to be a temporary easing in energy prices," Muller said.
"Against this backdrop, and the recent inflation expectations results that suggest that inflation shocks are beginning to influence medium- to longer-term inflation perceptions, we continue to expect a further 25-basis point increase in the repo rate."
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