The window for rate cuts has closed. As renewed conflict in the Middle East sends oil prices surging and inflation expectations climbing, the South African Reserve Bank (SARB) faces a familiar but uncomfortable reality: the fight against inflation is not yet won.
Citadel expects the SARB to hold interest rates at the upcoming Monetary Policy Committee (MPC) meeting – but make no mistake, the balance of risks has shifted. The question is no longer when cuts will arrive, it is whether further hikes may be necessary.
According to Citadel Chief Economist, Maarten Ackerman, “The recent rise in inflation expectations has changed the near-term interest rate outlook and is likely to keep the SARB cautious.”
“Our expectation at Citadel is that the SARB will remain on hold at the next MPC meeting. This view reflects the recent rise in inflation expectations following renewed geopolitical tensions in the Middle East and the sharp increase in oil prices, both of which pose meaningful inflation risks for South Africa (SA) over the next 12 to 18 months,” says Ackerman.
He explains that “Rising oil prices and escalating geopolitical uncertainty have had a significant impact on local inflation expectations. The SARB has already adjusted its inflation forecasts upwards over its three-year forecast horizon.”
“Depending on where oil prices ultimately settle, inflation could move above 4.5% and in more severe scenarios, such as a prolonged disruption in the Middle East with oil prices sustained above $140/barrel, inflation could be materially higher,” notes Ackerman.
Inflation risk extends beyond oil
Ackerman cautions that “the risk is not limited to oil prices alone. Secondary effects, including higher food prices, transport and freight costs and broader supply-chain pressures, are likely to also intensify as a result.”
“SA imports a substantial portion of its fertiliser from the Middle East, which raises input costs for the agricultural sector and further exacerbates food price inflation.”
“Against this backdrop, the SARB is expected to remain cautious. While a hold in interest rates remains the base case, the balance of risks suggests that further rate increases cannot be ruled out if inflation or inflation expectations continue to rise, despite the mounting pressure this places on consumers and already-weak economic growth,” he says.
Ackerman adds that “the SARB’s primary mandate is to anchor inflation and inflation expectations around its 3% target and this objective will take precedence.”
“As a result, expectations of interest rate cuts in the near term are firmly off the table. The current outlook is for a prolonged period of restrictive monetary policy, with the possibility of further tightening depending on inflation developments,” says Ackerman.
Global inflation pressures disrupt the rate-cut cycle
Ackerman notes that “SA finds itself in a position similar to many global central banks. Prior to the Middle East conflict, central banks were making tangible progress in the fight against inflation and were approaching a phase of rate cuts. That trajectory has now been disrupted by renewed global inflationary pressures.”
While the SARB is not directly influenced by other central banks’ decisions, Ackerman says “it is facing the same global headwinds.”
“The unfortunate consequence of ‘higher for longer’ interest rates is that consumers are squeezed from multiple angles. Higher fuel prices reduce disposable income, while elevated borrowing costs keep the cost of capital high,” he says.
“Together, these forces weigh on consumption, suppress investment activity and dampen investor confidence, ultimately constraining economic growth.”
“In this environment, it is increasingly important for investors to focus on high-quality real assets and investments that can deliver sustainable, inflation-beating returns.”