The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) is heading into what could be one of its most consequential meetings in recent years, as the country’s inflation trajectory grows increasingly precarious and difficult to predict. The MPC’s next interest rate decision is scheduled to be announced on Thursday, the 28th of May, and this announcement will come just days after a pivotal Consumer Price Index (CPI) release that is expected to shape the tone and direction of the meeting significantly.
Key Takeaways
- The April CPI print is critical: Fuel price shocks from the US-Iran war are expected to push inflation to between 3.7% and above 4.0%, potentially breaching the SARB’s upper tolerance limit just days before the May MPC meeting.
- The SARB could hike before trouble is confirmed: The bank has signalled a readiness to act pre-emptively rather than wait for second-round inflationary effects to fully materialise, as it did during the 2022 Russia-Ukraine shock.
- A May rate hike is a real possibility: Despite an already restrictive repo rate of 6.75%, the SARB’s hawkish stance and market pricing suggest a 25 basis-point increase at the 28 May meeting cannot be dismissed.
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South Africa’s Inflation Trajectory: A Closer Look
Consumer price index data published in April, covering the month of March, revealed a modest uptick in headline inflation to 3.1%, which followed a 3.0% reading recorded in February. Although the March figure was published in the aftermath of the United States’ military conflict with Iran, which began on the 28th of February, the data did not yet capture the full economic repercussions of that conflict – particularly the surge in global fuel prices that came to bear most heavily on April’s figures.
CPI measures the average change over time in the prices paid by consumers for a basket of goods and services. In South Africa, this basket is compiled by Statistics South Africa (Stats SA) and covers categories such as food, housing, transport, health, and education.
The April Fuel Price Shock: The Real Inflationary Threat
According to Investec’s Chief Economist Annabel Bishop, the fuel price shock that materialised in April will only become visible in the CPI data to be released the week before the MPC meeting. Bishop noted that this shock is widely expected to push the overall inflation reading upward in a meaningful way, and it is this forthcoming print that will place the MPC under considerable pressure.
The range of projections for the April CPI print varies considerably across economists and institutions:
| Scenario | Projected April CPI | Within Tolerance Band? |
|---|---|---|
| Conservative estimate | ~3.7% | Yes (band: 2%-4%) |
| Aggressive estimate | Above 4.0% | No – breaches upper limit |
| SARB target | 3.0% | Yes – at midpoint |
| February actual | 3.0% | Yes – at midpoint |
| March actual | 3.1% | Yes – within band |
South Africa adopted a formal inflation targeting framework in February 2000, making the SARB one of the earlier emerging-market central banks to do so. The current target range of 3%-5% was later revised to a point target of 3% with a 1% tolerance band on either side.
Understanding the SARB’s Inflation Target Framework
The SARB’s current inflation target of 3.0% year-on-year carries with it a tolerance band of 1% in either direction, which means that CPI readings between 2.0% and 4.0% are considered acceptable within the framework. This design allows for a temporary deviation from the 3.0% year-on-year target without immediately triggering a monetary policy response – but this latitude has its limits, as Bishop explained. The tolerance band is not a licence for persistent deviation; should inflation settle away from the 3.0% target on a more lasting basis, the committee would be compelled to act.
The Iran War’s Role in South Africa’s Price Pressures
Whilst central banks across the world routinely look through short-lived inflation shocks – treating them as transitory bumps rather than structural problems – the calculus changes considerably when those shocks become entrenched in the broader economy. In the months since the conflict between the United States and Iran erupted, economists have consistently warned that the longer the war persists, the greater the risk that so-called second-round inflationary effects would take hold and prove more difficult to dislodge.
Second-round effects refer to the process by which an initial price shock – such as a sharp rise in fuel costs – feeds into higher wages, elevated production costs, and ultimately broader price increases across the economy, creating a self-reinforcing inflationary dynamic.
The term “second-round effects” comes from the idea of a first-round effect being the direct price impact of a shock (e.g. petrol prices rising) and the second round being the knock-on effects as businesses and workers adjust their expectations and behaviour accordingly. The South African Reserve Bank closely monitors wage settlement data as an early indicator of second-round effects.
Bishop confirmed that the MPC would be scrutinising the inflation data carefully for precisely these kinds of second-round effects throughout the second quarter of 2026 and across the remainder of the year. Significant evidence of such effects would, in her assessment, be sufficient to drive the committee toward interest rate hikes.
The SARB’s Hawkish Stance and Pre-emptive Rate Action
In a notable and important caveat, Bishop warned that the SARB has already signalled that it may not wait for second-round effects to appear in the data before acting – suggesting instead that the committee could move in a pre-emptive fashion, hiking rates before those effects are formally confirmed. This hawkish posture is already being reflected in South Africa’s financial markets, with multiple rate hikes now priced into the Forward Rate Agreement (FRA) curve.
Will the SARB Skip or Hike in May?
Despite the heightened uncertainty and the hawkish signals, Bishop expressed the view that the SARB is more likely to skip rate hikes at the May meeting, opting instead to look through the April jump in inflation as a temporary phenomenon. One of the key factors supporting this view is that real interest rates in South Africa are currently deeply restrictive. With the repo rate sitting at 6.75%, monetary policy is already applying significant braking pressure on the economy, which limits the urgency of immediate further tightening.
The “real interest rate” is calculated by subtracting the inflation rate from the nominal interest rate. When the real interest rate is significantly positive – meaning the nominal rate is well above inflation – monetary policy is considered restrictive, as it discourages borrowing and spending. South Africa’s current real rates are among the highest in the emerging market universe.
The Risk That the SARB Jumps the Gun
However, this expectation of a pause is far from certain, and the risk of a pre-emptive hike remains very real. Bishop pointed to the SARB’s previously stated preference for acting early and decisively, noting that the bank has indicated that striking pre-emptively – by raising rates sooner rather than later – can result in fewer total rate hikes being necessary over the full course of a tightening cycle.
Lessons from the Russia-Ukraine War Inflation Shock
Bishop highlighted that the SARB previously employed this same pre-emptive approach during the inflationary surge that followed Russia’s invasion of Ukraine in 2022, a period which produced significant energy price shocks with global ripple effects not unlike those being experienced now. During that episode, the MPC moved aggressively and early, raising the repo rate by a cumulative 475 basis points between November 2021 and May 2023.
Between November 2021 and May 2023, the SARB raised the repo rate from 3.5% to 8.25% – a total increase of 475 basis points – in response to the post-pandemic and Russia-Ukraine war inflation shock. The rate was subsequently cut in stages as inflation returned toward target, reaching 6.75% by early 2025.
Given this historical precedent, Bishop warned that there is a genuine risk the MPC could choose to repeat that playbook – hiking the repo rate in May rather than waiting until at least July to assess whether second-round effects are materialising. Should the committee lean in that direction, a 25 basis-point increase could well be on the table at the May meeting, adding to the financial pressure already being felt by South African households and businesses navigating a fragile economic environment.
Conclusion
As South Africa approaches the 28 May MPC meeting, the stakes could hardly be higher. A fuel-driven inflation surge, a central bank with a well-documented appetite for pre-emptive action, and a financial market already pricing in multiple rate hikes together paint a picture of a country on the edge of a new tightening cycle. Whether the SARB opts to hold steady or pull the trigger in May, one thing is clear – the era of easing is over, and South African households and businesses would do well to prepare for the possibility that borrowing costs may soon climb higher before they come back down.
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