The SA Reserve Bank’s second interest rate decision for 2026 came while the war in the Middle East continues, with associated high fuel prices. The rand has been remarkably stable.

• The SA Reserve Bank increased the interest rate by 25 basis points.
  
• The inflation outlook has worsened, and might average 4.4% this year.
• The bank’s quarterly projection model predicts up to three more interest rates.
  
• For more financial news, visit News24 Business.

The South African Reserve Bank (SARB) increased the interest rate by 25 basis points in light of massive risks to inflation, as the hopes for a quick end to the Middle East conflict have faded.

It is the first interest rate hike since May 2023.

The six members of the monetary policy committee (MPC) were split on the vote, with four members voting for a hike and two favouring no change. It was the first MPC meeting attended by Dr Konstantin Makrelov as the new chief economist, after the retirement of Dr Christopher Loewald.

Governor Lesetja Kganyago said it is vital for the SARB's credibility to act quickly and with conviction. The SARB has now become one of only a few central banks to have hiked, after the Reserve Bank of Australia raised rates last month.

Inflation is now expected to average 4.4% in 2026 – significantly higher than the 3.7% forecast in March. It could be 3.7% in 2027, before moving back to the 3% target in 2028.

The 4.4% far exceeds the 1 percentage point tolerance allowed above the target.

“In such adverse conditions, it is crucial that central banks maintain their credibility and prevent higher inflation from becoming entrenched,” said Kganyago.

“Although we do not have the tools to prevent the initial effects of supply shocks, monetary policy is responsible for longer-run inflation. We take this duty seriously, and reiterate our commitment to bringing inflation back to 3%, over time.”

The decision brings the repo rate (the rate at which the SARB loans money to commercial banks) to 7% and the prime lending rate of banks to 10.5%. The prime rate, set 3.5 percentage points higher than repo, is set to be replaced soon by a neutral “reference rate”.

Two to three more interest rate hikes are foreseen, depending on the length of the Iran war and also depending on the additional risk of a super El Niño expected later this year. The timing of potential hikes is not clarified, with the usual disclaimer being offered that it will depend on incoming data.

He said the Iran conflict is putting downward pressure on economic growth globally, while global inflation is rising. The strong rand has helped to contain local inflation somewhat, but the sharp increase in fuel prices is already reflected in a higher inflation rate.

Kganyago sees renewed pressure on food prices due to rising diesel and fertiliser prices.

Economic growth expectations were lowered, with the MPC now forecasting growth of only 1.2% for 2026, compared with 1.4% hoped for in March. Hope for 2027 growth is lowered from 1.9% to 1.7%, but the prospect of 1.9% growth for 2028 is kept unchanged.

The lower growth comes not only because of geopolitical tensions, but also because of the recent severe flooding in the Eastern and Western Cape. However, the fundamentals in the SA economy remain strong, as proven by the Moody’s Ratings upgrade last week, Kganyago said.

Impact on people with debt

For people with debt, the decision roughly translates as follows:

For every R1 million loaned at the prime interest rate on a 20-year bond, the repayment will increase by approximately R168 per month, while there will be an increase of about R12 for every R100 000 borrowed for a car paid off over five years.

This means a family paying off a R2 million home and two cars worth R400 000 each will need about R432 extra every month. Interest on credit cards and personal loans will also increase.

This adds to the R6.53 per litre increase in the Gauteng price of 95-octane petrol since March, and the R13.26 per litre increase in the Gauteng wholesale price of diesel with 0.05% sulphur.