Policy rate frozen as global conflict clouds economic outlook
South Africa's central bank has opted to maintain the repo rate at 6.75%, as escalating hostilities in the Middle East continue to inject uncertainty into global markets and threaten both inflation trajectories and economic expansion prospects.
Reserve Bank Governor Lesetja Kganyago announced the unanimous decision during a briefing in Pretoria on Thursday, emphasising that most major central banks around the world have similarly chosen to hold rates steady while awaiting clearer signals about the crisis's lasting effects.
"The fact is, we are still only a few weeks into this crisis. The coming months will be crucial for assessing the longer-term inflation consequences. Given current forecasts, we see inflation risks to the upside."
Kganyago characterised the Middle East conflict as a textbook supply shock — one that simultaneously pushes prices higher while dampening consumer demand. He stressed that monetary authorities must distinguish between unavoidable first-round price increases and more dangerous second-round effects, where an initial disruption cascades into widespread inflation across the economy. The priority, he noted, is ensuring any price response remains temporary rather than entrenched.
Growth recovery under threat despite positive signs
Turning to domestic economic performance, the Governor pointed to fourth-quarter expansion in 2025, with annual output growth registering at 1.1%. While this represents an improvement on recent years, it remains considerably below longer-term historical averages. Encouraging indicators such as rising business confidence and stronger investment have emerged, but the ongoing conflict poses a genuine risk to the country's growth trajectory.
The central bank's projections anticipate growth climbing towards approximately 2% over the coming years, though Kganyago acknowledged that downside risks have intensified. Data revisions have adjusted 2025 growth figures downward, which makes 2026 comparisons appear somewhat more favourable, partially offsetting the impact of current global disruptions.
On the inflation front, February's headline figure stood at 3.0%, with core inflation matching at the same level — comfortably within the bank's target range. However, rising energy costs are expected to push headline inflation towards 4% in the near term, with fuel price increases potentially exceeding 18% during the second quarter. The baseline forecast anticipates a gradual easing of these pressures, with inflation returning to 3% by late next year.
"The first scenario assumes that the conflict lasts another two months or so, with oil prices averaging nearly US$100 per barrel for this period and the rand about 5% weaker against the dollar. The second, more extreme scenario has the war lasting over a year, with oil prices staying above US$100 per barrel and the rand 10% weaker."
Under the first scenario, inflation would breach 4% and necessitate a single rate hike this year, with a return to target during 2027. The more severe projection sees inflation surpassing 5%, requiring multiple rate increases, with normalisation only achievable by 2028. Both scenarios foresee initial economic weakness followed by a period of recovery.
"South Africa has made important macroeconomic progress recently, with a lower inflation target, improved fiscal prospects and steadier growth."
Despite the challenging global environment, Kganyago struck a cautiously optimistic note about the country's broader economic fundamentals, citing recent fiscal improvements and the adoption of a lower inflation target as evidence that the nation is better positioned to weather external shocks than in previous years.
South African households and businesses face a period of heightened uncertainty as rising oil prices and rand weakness could drive fuel costs up by more than 18 percent in the coming months, squeezing consumer budgets and raising operating expenses. The Reserve Bank's decision to hold rates provides temporary relief for borrowers, but the possibility of future hikes depends largely on how long Middle East tensions persist, with the worst-case scenario delaying economic normalisation until 2028.
