Chief economist says SARB likely to hold rates after tight call on July decision

PSG Financial Services chief economist Johann Els expects the South African Reserve Bank’s Monetary Policy Committee to keep interest rates unchanged when it meets next week, but says the decision will be a tight call.

Key data and timing

Statistics South Africa will release the June consumer price index on Wednesday, 22 July, with the MPC set to announce its interest rate decision the next day. Els said the June print will be watched closely, but is unlikely to decisively sway the MPC because the committee would have completed its own forecasts ahead of the release.

Inflation outlook and drivers

Els expects headline inflation to rise from 4.5% in May to around 4.7% in June, reflecting a monthly increase of roughly 0.5%. He attributed much of the higher inflation figure to rising fuel prices following renewed conflict in the Middle East and a failure of the ceasefire to hold.

“While 4.7% is obviously higher than the Reserve Bank would like to see, it’s important to remember that most of this increase is being driven by fuel prices,”

Els said there is still very little evidence of meaningful second-round inflation effects. He expects inflation to ease to about 4.3% in July, remain around that level in August, and then drift towards 4.0% by year-end.

Short- and medium-term forecasts

Els projected inflation to be around 4.0% for all of 2026, before easing to about 3.5% in 2027. He noted that recent rises in oil prices with oil trading back near $85 per barrel and sharply higher inflation expectations for Q2 2026 complicate the policy call. He also said fuel under-recoveries have widened.

Why a hold is still likely

Els pointed to several reasons the MPC could leave rates unchanged. The Reserve Bank’s early and pre-emptive 25 basis point rate hike in May makes another immediate increase less likely. He also noted that an inflation expectations survey was conducted when oil prices were above $100 per barrel, so that survey may overstate current inflation risks.

Additional factors cited by Els include the fact that many other central banks have not hiked rates, the rand exchange rate has remained incredibly stable, and there is little evidence that higher fuel prices are feeding into broader inflation. He said wage settlements in Q2 appeared largely unchanged.

“Overall, I think this will be a very close call – closer than I expected before the renewed conflict in the Middle East,”

Els expects a divided MPC vote, with some members favouring another hike and others arguing the May increase was sufficient. For now, he believes the MPC will keep rates unchanged despite the return to conflict in the Middle East.

Outside view

BusinessTech noted that Bank of America expects a hike next week, forecasting the repo rate would reach 7.25% and prime 10.75%.