By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole & Ame Muller
The South African Reserve Bank (SARB) raised the repo rate by 25-basis points (bps) to 7.25%, effective 25 September, in a unanimous decision and in line with our and market expectations. The move reflects a deterioration in the near-term inflation outlook following the renewed surge in fuel prices, alongside rising global interest rates and concerns that the current supply shock could become embedded in domestic price-setting. The decision marks a clear shift from the July pause, although the SARB's baseline policy path does not point to an aggressive tightening cycle.
The Monetary Policy Committee (MPC) noted that escalating geopolitical tensions have created a large and persistent global supply shock, with disruptions to oil and food supplies adding to inflationary pressures. The SARB has consequently raised its near-term inflation forecasts (Figure 1) and now expects headline inflation to rise above 5.0% later this year and early next year, before moderating as the fuel-price shock recedes. Inflation is expected to return to around 3.0% towards the end of 2027.
The MPC remains relatively comfortable with developments in food and core goods inflation with food inflation at its lowest level since 2010, while the rand's resilience has helped contain import-price pressures. However, services inflation remains elevated, with price increases in several categories well above the 3.0% target. The SARB is particularly concerned that prolonged supply shocks could generate second-round effects, with higher individual prices becoming more broadly embedded in inflation expectations, wages and domestic price-setting.
Inflation expectations have provided some offset, having eased modestly in the latest BER survey, although longer-run expectations remain around 4.0%. The SARB noted that the survey was conducted before the latest fuel-price increases, while market-based measures of inflation expectations have increased recently. This reinforces the MPC's assessment that inflation risks are currently skewed to the upside.
The decision comes against a weaker domestic growth backdrop. The economy contracted by 0.2% in 2Q26 and the SARB continues to assess growth risks as skewed to the downside. Nevertheless, it retains its above-1.0% growth forecast for 2026 and expects growth of around 2.0% over the medium term (Figure 1), assuming global conditions stabilise and domestic reforms improve the business environment.
The 25bp increase therefore reflects the difficult trade-off facing monetary policy. The SARB is responding to the risk that the current supply shock becomes entrenched rather than attempting to offset the initial increase in fuel prices through aggressive demand compression. The increase can thus be viewed as a measured response to a more persistent inflation threat, while recognising that domestic economic activity remains weak.
Importantly, the SARB's baseline policy path does not point to an immediate sequence of further increases. Its Quarterly Projection Model (QPM) has the policy rate broadly stable through the remainder of this year, followed by cuts later in the forecast as inflation returns towards 3.0% and monetary policy moves towards a more neutral stance. However, the MPC stressed that this remains a broad guide and that decisions will continue to be taken on a meeting-by-meeting basis.
The scenarios considered at this meeting nevertheless underscore the risks around the baseline. A stronger-than-expected increase in global interest rates would put downward pressure on the rand and lift domestic inflation, resulting in a tighter policy stance and rates around one hike above the baseline path, with slower subsequent cuts; however, higher inflation expectations and wage increases could result in between one and two additional hikes above the baseline peak, with rates remaining higher for longer.
Overall, the September decision signals a more restrictive monetary policy stance, but not necessarily the start of a prolonged tightening cycle. The SARB's immediate priority is to prevent the current fuel and supply shock from becoming entrenched in domestic inflation expectations and price-setting. The baseline remains for rates to hold broadly steady through the remainder of 2026, but the balance of risks has shifted towards further tightening should oil-price pressures persist, or second-round effects become more evident.
Looking ahead, the key issue is whether the current inflation shock proves temporary, as assumed in the SARB's baseline, or becomes more persistent. A moderation in fuel prices and inflation expectations would support the SARB's projected path towards eventual easing. Conversely, sustained global rate increases, rand weakness, higher wage pressures or a further deterioration in inflation expectations would increase the risk of rates remaining higher for longer.
Week in review
The leading business cycle indicator declined by 0.9% month-on-month (m/m) to 118.2 in July, while annual growth slowed to 2.3% from 4.5% previously. The monthly decline reflected decreases in six of the ten available components. The largest negative contributors were deceleration in the six-month smoothed growth rate in the real M1 money supply and a decrease in the number of residential building plans approved. In contrast, the main positive contributors were an acceleration in the six-month smoothed growth rate in job advertisements and a widening of the interest rate spread.
Headline inflation edged up to 4.4% year-on-year (y/y) in August from 4.3% in July, with no monthly pressure. Core inflation eased marginally to 4.1% y/y, also showing no monthly pressure. Services inflation recorded 0.1% month-on-month (m/m), and 5.1% y/y. Average fuel prices declined by 1.3% m/m but were 20.0% higher than in August 2025. Food and NAB inflation ticked up to 1.1% y/y, from 0.9% previously, while monthly pressure was 0.1%, driven mainly by higher meat prices. We predict that headline inflation will lift to 4.7% for September.
Weekly Round-Up: Economics from Broader Africa
Economic developments across the region were mixed this week, reflecting varying macroeconomic and policy dynamics. Inflationary pressures remained elevated but generally eased in Botswana, while Nigeria adjusted its monetary policy framework amid strengthening external buffers. Growth prospects in Eswatini remain positive despite a downward revision to the 2025 performance, and Lesotho advanced its digital transformation agenda through major artificial intelligence (AI)-related investments. Meanwhile, Ghanaian markets turned more cautious ahead of the central bank's policy decision, and Namibia's vehicle market moderated following a period of strong growth.
