The South African Reserve Bank has increased its policy rate by 25 basis points to 7.25%, effective Friday, citing rising inflation risks primarily driven by higher fuel prices amid global oil supply disruptions. This decision, announced by Governor Lesetja Kganyago, was unanimous among the six members of the Monetary Policy Committee. The increase is expected to impact consumers, with the prime lending rate rising to 10.75%.
According to Governor Kganyago, the bank's near-term inflation forecasts have been revised upward, with headline inflation expected to exceed 5% later this year and early next year before decreasing as the fuel price shock subsides. The decision to raise rates comes after recent data showed consumer inflation ticked up to 4.4% in August, driven by housing, utilities, and transport costs.
Despite current inflation data, the Reserve Bank focuses on the longer-term outlook, and the latest increase follows a report showing that inflation expectations moderated in the third quarter of 2026. The Bureau for Economic Research survey indicated that expectations among analysts, businesspeople, and trade union officials for headline consumer inflation in 2026 remained unchanged at 4.4%.
However, inflation expectations eased to 4% for 2027 and 3.8% for 2028, with household forecasts declining sharply to 4.9%, their lowest level in nearly five years. Governor Kganyago noted that while expectations have eased slightly, they remain high, and the bank is aware that the survey was conducted before recent fuel price increases.
The rate increase is part of a global trend, with other monetary policymakers, including the European Central Bank, the Bank of Japan, and the US Federal Reserve, also hiking rates in response to inflationary pressures. The Reserve Bank's decision aims to ensure inflation returns to the 3% target as the current shock fades.
The economy contracted 0.2% in the second quarter of the year, which could have argued for keeping rates on hold. However, Governor Kganyago acknowledged that global shocks are hurting the economy but expressed confidence in a rebound during the second half of the year, with annual GDP growth for 2026 projected at 1.2%.
The Reserve Bank projects growth of around 2% over the medium term, based on global conditions stabilizing and domestic reforms delivering a better business environment. However, growth risks are skewed to the downside, and the bank remains focused on its price stability mandate to deliver the desired inflation outcome.
Key points
- The South African Reserve Bank raised its policy rate by 25 basis points to 7.25% due to inflation risks driven by higher fuel prices.
- The bank's near-term inflation forecasts have been revised upward, with headline inflation expected to exceed 5% later this year and early next year.
- The rate increase aims to ensure inflation returns to the 3% target as the current shock fades, despite economic contraction in the second quarter.
