By Thebe Mabanga
The Reserve Bank’s Monetary Policy Committee (MPC) kept the repo rate unchanged at 6.75% in a unanimous decision, opting for a wait-and-see approach amid the war in Iran and neighbouring states in the Middle East.
“Since our last meeting, the key event has been the outbreak of conflict in the Middle East,” said Governor Lesetja Kganyago when presenting the MPC statement.
“Prices for commodities like oil, gas and fertiliser have moved sharply higher. Meanwhile, there have been broad losses across equity, bond and currency markets, with only a few safe havens and energy producers showing gains,” Kganyago said, referring to the upheaval of the past three weeks.
“We are just a few weeks into this shock, and conditions remain extremely uncertain. At this stage, it is clear that global inflation will be higher in the near term, while growth will likely suffer from supply-chain disruptions and rising costs. But the longer-term outlook is less clear,” he said.
He drew parallels with four years ago, when the conflict between Russia and Ukraine broke out.
Central bankers globally, including in South Africa, initially based forecasts on the assumption the conflict would last about six months — not the four years it has endured.
Turning to South Africa, Kganyago noted that after positive fourth-quarter growth, the economy expanded by 1.1% for the year as a whole.
“This is better than recent years but still well below longer-run averages,” he said, adding that while there have been encouraging green shoots, the war is likely to disrupt growth.
The Middle East conflict is now expected to push up inflation, which stood at 3% in February, in line with the Reserve Bank’s new target.
“We expect headline inflation will soon accelerate to around 4%, with fuel inflation above 18% in the second quarter,” the MPC said.
Kganyago described the conflict as a supply shock, which tends to raise prices and weaken demand. “The standard response to a supply shock is to look through first-round effects, which are unavoidable and cannot be offset by interest rate changes,” he said.
“At the same time, central banks should remain alert to second-round effects, where an initial shock triggers broader price increases.”
He said the Bank monitors indicators such as wages and inflation expectations for second-round effects, and acts accordingly.
“In previous meetings, we warned of elevated risks and proceeded cautiously in our rate setting. Now a crisis has hit, this prudent approach is proving appropriate,” Kganyago said.
The Bank’s Quarterly Projection Model, used as a guide for interest rate movements, had previously forecast rate cuts in the second half of the year.
It has now removed those expectations.
The Bank has also updated its scenarios in response to recent developments.
Kganyago said the first scenario assumes the conflict lasts another two months, with oil prices averaging nearly US$100 per barrel and the rand about 5% weaker against the dollar.
The second, more severe scenario sees the war lasting over a year, with oil prices remaining above US$100 per barrel and the rand 10% weaker.
“In both scenarios, inflation is higher — exceeding 4% in the first and 5% in the second. Both call for higher interest rates this year,” he said.
He concluded by noting South Africa’s recent economic progress, including a lower inflation target, an improved fiscal outlook and a ratings upgrade as economic reforms take hold.
“Prudent monetary policy will help sustain these gains despite difficult global conditions. Further support would come from achieving a sustainable public debt level, lowering administered price inflation, and continuing structural reforms that lift potential growth,” Kganyago said.
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