The recently signed peace agreement between Iran and the United States might cause the South African Reserve Bank (SARB) to reconsider its current interest rate trajectory, though the central bank still needs to assess how persistent recent fuel price increases prove to be. According to Deputy Governor Rashad Cassim, who spoke to BusinessTech, the truce between Washington and Tehran could lead the SARB to revise its rate approach, potentially resulting in a less aggressive tightening cycle than previously anticipated.
Key Takeaways
- Rate path may soften: The US-Iran peace deal could lead the SARB to ease off its tightening cycle, with Deputy Governor Rashad Cassim suggesting fewer or smaller rate hikes than previously expected.
- Inflation surge tied to oil shock: South African inflation jumped from 3.1% in March to 4.5% in May after the Strait of Hormuz closure triggered a global oil supply shock, prompting a 25 basis point hike to a 7% repo rate.
- Risks remain on multiple fronts: Sticky inflation, rising food and fertiliser costs, El Niño drought risks, and rand depreciation against higher international real interest rates could still complicate the SARB’s path forward.
Background to the Rate Hike
At the beginning of the year, most analysts and economists had expected the SARB to begin cutting interest rates, largely because inflation was sitting close to the newly adopted 3% target.
That outlook changed quickly once Israel and the United States launched attacks on Iran, which was followed by the closure of the Strait of Hormuz. This triggered a global oil supply shock, and fuel prices climbed at a rapid pace as a direct consequence.
The Strait of Hormuz is one of the most strategically important waterways in the world, with roughly a fifth of global oil consumption passing through it, which is why any disruption there tends to send shockwaves through energy markets almost immediately.
As a result of these developments, inflation in South Africa accelerated noticeably, climbing to 4.0% in April and then to 4.5% in May, a sharp jump from the 3.1% recorded in March.
Faced with this shift, the Reserve Bank responded by lifting interest rates by 25 basis points at its May meeting, which pushed the repo rate up to 7% and brought the prime lending rate to 10.5%.
Quick Snapshot of South Africa’s Inflation Climb
| Month | Inflation Rate |
|---|---|
| March 2026 | 3.1% |
| April 2026 | 4.0% |
| May 2026 | 4.5% |
SARB Governor Lesetja Kganyago had previously cautioned that as many as three additional interest rate increases could still occur before the year is out.
The Peace Deal Changes the Picture
Since then, the United States and Iran have put pen to paper on a temporary peace agreement aimed at bringing their conflict to a close and reopening the Strait of Hormuz, the waterway through which roughly 20% of the world’s oil supply travels.
Although the situation on the ground remains far from settled, sentiment in the markets has increasingly tilted towards the belief that the conflict is winding down.
Market sentiment shifts like this often move faster than the actual policy decisions that follow them, since traders and investors tend to price in expectations well ahead of central banks formally adjusting their stance.
Cassim noted that the SARB had previously harboured concerns over whether elevated oil prices were going to persist, or whether the initial shock to the market would gradually fade away.
Should inflation indeed begin to ease, Cassim indicated that this would considerably simplify matters for the SARB’s Monetary Policy Committee (MPC).
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Not Out of the Woods Yet
Even though the peace agreement has now been formally signed, uncertainty remains around how sticky inflation will prove to be, in other words, a situation in which prices stay elevated and take longer than expected to come back down.
“Sticky inflation” is a widely used economic term describing prices that resist falling even after the original cause of inflation has eased, often because businesses are slow to lower prices once they have already adjusted them upward.
Cassim pointed out that monetary policy is generally not a particularly effective instrument for dealing with major price shocks directly, and is better suited to influencing how price setters behave across the broader economy.
He explained further that when price setters have confidence the SARB will hold firm to its 3% inflation target, this tends to discourage them from raising prices excessively, which would otherwise fuel further inflation.
Other Pressures Facing the SARB
Beyond the oil price shock, several other factors continue to weigh on the inflation outlook:
- Food prices, which make up the largest single component of the Consumer Price Index (CPI) basket, are facing renewed upside risks.
- Higher oil prices also raise the likelihood of increased fertiliser costs, which would add further pressure to food price inflation.
- South Africa could additionally be affected by the El Niño weather pattern, which is associated with drought conditions, and Cassim confirmed that the MPC is factoring these drought-related risks into its considerations.
Real Interest Rates and Currency Considerations
Cassim also addressed the matter of real interest rates, that is, interest rates after inflation has been subtracted, noting that viewing monetary policy purely through this lens can be somewhat restrictive.
He highlighted that South Africa currently holds real interest rates of approximately 4%, whereas the United States sits at around 2%, based on 10 year bond yields.
A higher real interest rate generally makes a country’s bonds more attractive to foreign investors, since it offers a better inflation adjusted return, though this benefit can be offset by other risks such as currency volatility.
What This Means for the Rand
While this differential works in South Africa’s favour on paper, Cassim cautioned that investors must also weigh up the risk of currency depreciation when making decisions.
For the SARB specifically, the gap between local and international interest rates becomes problematic when higher rates offered in safer, less risky international markets cause the rand to weaken.
Conclusion
Although the US-Iran peace deal offers a glimmer of relief for South Africa’s interest rate outlook, the SARB is not yet ready to declare victory over inflation. With food prices, fertiliser costs, and the looming threat of an El Niño-induced drought still posing significant upside risks, Cassim and the Monetary Policy Committee will likely take a cautious, data-dependent approach in the months ahead. For now, the central bank’s focus remains on ensuring the easing of the oil price shock translates into durable disinflation, rather than a temporary reprieve.
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