The surprising decision by the Reserve Bank's Monetary Policy Committee (MPC) to keep the repo rate at 7.0% came despite the unexpected increase in the inflation rate from 4.5% in May 2026 to 5.0% in June.
The MPC argued that economic growth would remain under pressure, as highlighted in its statement: "We see downside risks to growth."
The MPC indicated that the forecast from its Quarterly Projection Model (QPM) showed the policy rate remaining broadly stable through the remainder of the year. "The model shows cuts later in the forecast, as inflation falls to 3% and rates adjust towards neutral levels."
The MPC argued that the stronger rand since the beginning of the year had contributed to lower fuel prices in July, that food inflation remained subdued after increasing by only 1.4%, and that fuel prices were expected to decline significantly again.
The MPC's decision to keep the repo rate unchanged appears contradictory, given that it acknowledged in its statement that services inflation remains challenging, with most components now well above 3%, including insurance, transport, and housing.
"Our various measures of underlying inflation also indicate stronger inflation pressures."
The MPC also noted that the latest survey from the Bureau for Economic Research indicated that inflation expectations had risen. Inflation prospects have increased more for the near term than for the longer term. All survey groups included in the Bureau's survey projected higher inflation, with the largest increase coming from trade unions.
Although the MPC opted to keep interest rates unchanged, financial markets appeared to disagree.
The rand depreciated sharply after the MPC announcement against the US dollar, euro, and pound, testing R16.80 to the dollar on Thursday and trading as weak as R16.96 to the dollar on Friday before closing the week at R16.83 to the dollar.
The oil price shock also continued last week. A three front disruption across the Strait of Hormuz, the Red Sea, and the Black Sea pushed Brent crude above $100 per barrel on Thursday. Although prices eased to around $98 per barrel, leading to a modest recovery in equity markets and lower bond yields on Friday, global markets remained under pressure.
On the JSE, the All Share Index (ALSI) lost 1.8% on Friday following the MPC decision and the sharp increase in the oil price. Although the gold price recovered from $4,007 last Monday to $4,073 on Friday, while platinum and palladium also strengthened, most JSE indices ended the week weaker.
The ALSI ended the week virtually flat, gaining only 0.15%. It remains 14.3% lower than the level recorded before the US attack on Iran. A similar trend is evident across most major global indices.
Although the over recovery in petrol prices of R3.57 per litre and diesel prices of R5.10 per litre appeared encouraging at the beginning of July, the sharp increase in the oil price from $76 to $96 per barrel over the past four weeks, together with the rand weakening by more than 40 cents last week, erased any prospect of lower fuel prices in August.
By last Thursday, the diesel over recovery had already narrowed to 110 cents per litre. While petrol still reflected an over recovery of 41 cents per litre for 95 ULP, both petrol and diesel prices are now expected to increase next month, with diesel likely to record the steeper rise.
This week, domestic and global financial markets will focus on the US Federal Reserve's Federal Open Market Committee (FOMC) interest rate decision on Wednesday.
The consensus expectation is that the benchmark rate will remain unchanged at 3.75%. Should the FOMC decide to increase interest rates, the rand, bonds, and South African equities are likely to come under significant pressure.
The Bank of England (BoE) is expected to announce its interest rate decision on Thursday, with markets anticipating that it will also leave rates unchanged at 3.75%.
The United States will release its personal income and spending data on Thursday, while the eurozone is scheduled to publish its June unemployment rate on the same day.
Locally, Statistics South Africa (Stats SA) will release the government's budget balance and producer price inflation (PPI) data for June on Thursday. The South African Reserve Bank will publish South Africa's trade balance on Friday.
Chris Harmse is the consulting economist at Sequoia Investment Solutions and a senior lecturer at STADIO Higher Education.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
Image: Supplied
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