The Reserve Bank of South Africa was widely expected to raise interest rates by 25 basis points, with economists and investors arguing that an early, measured response would help control inflation expectations and avoid a more aggressive tightening cycle later.
Speaking to CNBC Africa ahead of the South African Reserve Bank's Monetary Policy Committee decision, Ninety One portfolio manager Adam Furlan and RMB chief economist and head of research Isa Mhlanga said the case for a near-term hike was strengthened amid rising external price risks, particularly from oil.
Market attention was focused on the hawkish tone set by SARB Governor Lesatja Kganyago, who recently warned that policymakers “do not have the luxury of waiting until we see the eye-whites of inflation.” Those remarks, delivered at the IMF spring meeting in Washington, were interpreted by investors as a clear signal that the central bank would take pre-emptive action rather than wait for inflation to rise.
Furlan said the governor's language effectively pointed to a 25 basis point increase in the repo rate. He compared the current setup to the SARB's previous response to inflation shocks in 2022, recalling another memorable Kganyago analogy: If there is a snake in the house, policymakers should not linger on debating whether it came from the supply side or the demand side – they should act.
In Furlan's view, this is the right approach. He said taking action early would reduce the need for more stringent measures later, which would ultimately limit the damage to the economy. For fixed income investors like Ninety One, central bank credibility is particularly important as it underpins confidence in the long-term real yield and underlying inflation path of South Africa's government bonds.
“Acting slowly and quickly gives them optionality,” Furlan said. He said the bank does not need to move aggressively with a 50 basis point rate hike, but should instead start leaning against the risks of inflationary expansion across the basket.
Mhlanga broadly agreed, saying the RMB is expected to rise by 25 basis points at the current meeting, followed by another 25 basis points in July. He said the potential cycle would be shallow compared to the post-pandemic phase of rapid footfall.
Unlike 2022, when South Africa was emerging from deeply negative real interest rates, real rates are now already relatively high, he said. This means policy makers are starting from a more restrictive starting point, reducing the need for extended or severe hiking cycles.
“We think the hiking cycle is likely to be shallow as real interest rates are still quite high,” Mhlanga said. He estimated South Africa's neutral real rate to be around 2.5% to 2.8%, while current real rates are already close to 3%, suggesting that monetary policy is a bit restrictive.
That assessment matters for the way forward. Furlan said the base case for Ninety One was for two to three increases in total, which would mean a tightening of 50 to 75 basis points cumulatively. This is likely to push the repo rate to around 7.5%, he said, a level that would keep real rates closer to 3% and be appropriately restrictive primarily for supply-side shocks.
Nevertheless, both men stressed that the outlook is highly dependent on global oil prices and geopolitical developments in the Middle East. Mhlanga said RMB's forecast assumes some normalization in oil markets by September, with Brent prices gradually falling over time. But he acknowledged that conflicts often last longer than initially expected, citing Russia's war in Ukraine as a reminder that what starts as a short-term shock can turn into a multi-year inflationary pressure point.
Under Ninety One's central scenario, inflation would peak near 5% in the fourth quarter before falling below 4% by the middle of next year, allowing the SARB to limit the cycle to a handful of quarter-point moves. But if oil prices continue to rise or food inflation accelerates – including potential pressures linked to El Nino – the central bank may need to do more.
An important part of the debate is not only the immediate shock, but also the SARB's increasing commitment to the objective of low inflation. During the interview, both economists stressed that the bank must strengthen its credibility around the new 3% inflation target that has been agreed with the National Treasury.
Mhlanga argued that inflation disproportionately harms poor households and, if allowed to remain high, could lead to widespread social and political instability. He said responding late would make it harder and more costly to reduce inflation, potentially forcing policymakers into a longer and more painful tightening campaign.
He also rejected the notion that the central bank should invoke “opt-out clauses” and deal with shocks. In his view, South Africa had already learned the long-term costs of tolerating high inflation, having reversed previous target adjustments decades earlier. The better path, he said, is to endure short-term pain to secure a healthy long-term economy.
Furlan reiterated that message, saying the SARB has limited control over near-term fuel-driven inflation, but can still influence inflation expectations. That's why prompt action now matters, he said.
If the Bank waits too long, inflation expectations could exceed expectations, making it much harder to get inflation back to the 2% to 4% target band and eventually 3%. Proceeding in a pre-determined manner, SARB can signal severity without stifling growth.
The overall message from both the RMB and Ninety One was clear: a small, initial rate increase is not being seen as an overreaction, but as insurance against a very costly inflation problem later on.