Rising oil prices and renewed conflict in the Middle East have complicated the South African Reserve Bank's interest rate decision this week, with investment experts warning that inflation risks remain elevated.
Image: Hector Retamal / AFP
A fresh surge in global oil prices following escalating conflict in the Middle East has added another layer of uncertainty ahead of the South African Reserve Bank's (Sarb) Monetary Policy Committee (MPC) meeting this week, with investment managers warning that the central bank faces one of its most finely balanced interest rate decisions in months.
Brent crude climbed above $90 a barrel after renewed hostilities between the United States and Iran intensified over the weekend, reigniting concerns about inflation, financial markets and the outlook for interest rates globally.
The Reserve Bank will announce its latest interest rate decision on Thursday, one day after South Africa releases June inflation data.
Mike van der Westhuizen, portfolio manager at CAM Asset Management, said the central bank's decision remained too close to call, although markets appeared to be leaning towards another increase in borrowing costs or, at the very least, a more hawkish policy stance.
"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," Van der Westhuizen said.
He said while June's inflation figures would be closely scrutinised, they were unlikely to fundamentally alter a decision that would already have been largely formed.
"The inflation print released the day before the meeting may have some bearing on the final decision, but the decision would likely already have been largely shaped by then."
Van der Westhuizen said the Reserve Bank remained particularly concerned about core inflation, which strips out food and energy costs, as well as inflation expectations.
"Core inflation is still stubborn and is expected to come in around the high 3% level and possibly closer to 4% for the June print. That will matter because the Sarb is focused not only on current inflation, but also on where inflation is likely to move later in the year."
He said the central bank's credibility around its lower inflation target remained a key consideration.
"The Sarb has made a big push to anchor inflation expectations closer to 3%. When inflation was falling last year, expectations moved lower and the Sarb would have taken comfort from that."
However, he warned that longer term inflation expectations had begun moving higher again.
"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."
While inflation risks remain elevated, Van der Westhuizen said there were also compelling reasons for the Reserve Bank to leave rates unchanged.
"One of the bigger arguments in favour of a hold is that oil prices have fallen significantly since the previous MPC meeting. The rand has also been quite resilient. Lower oil and a resilient rand should help temper some of the inflation pressure."
However, he cautioned that renewed instability in the Middle East could quickly reverse those gains.
"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."
Neil Wilson, investor strategist at Saxo UK, said the weekend escalation had fundamentally altered the market outlook.
"The conflict in the Middle East appeared to broaden and escalate further over the weekend with the US hitting an Iranian nuclear power plant," Wilson said.
He noted that Brent crude had surged above $90 a barrel as traders priced in growing risks to energy infrastructure and shipping through the Strait of Hormuz.
"The MoU is effectively dead in the Strait of Hormuz and Gulf energy infrastructure is now back in the firing line with all the associated market risks. Risks now seem skewed towards higher for longer energy prices, inflation and rates."
The renewed jump in oil prices also pushed global bond yields higher as investors reassessed inflation expectations and the outlook for central bank policy.
Wilson said higher fuel costs were already beginning to affect businesses and consumers.
"Reflecting the uncertainty around the Middle East, Ryanair profits fell by a third as it contends with lower fares and higher fuel costs. Fares for the summer look soft as consumers are nervous about the impact of the Iran war and the economy."
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