WATCH: SARB hikes interest rate on back of higher inflation - IOL

South African Reserve Bank Governor Governor Lesetja Kganyago has announced a 25 basis point rate hike.

South African Reserve Bank (SARB) governor Lesetja Kganyago this afternoon announced that the prime lending rate would increase by 0.25 percentage points given the upside to inflation.

This morning, Statistics South Africa said inflation had moved to 4.4% in August from 4.3% the prior month.

In announcing the hike, the governor noted that oil had again gone up, with the country running an under recovery, while headline inflation was likely to hit 5% before slowing to 3% at the end of 2027.

Kganyago also said annual growth is projected at 1.2% this year, improving over the medium term. However, the governor warned that growth risks were skewed to the downside.

South Africa may start to see drought pressures from El Niño soon, even though food inflation has been trending lower lately, Kganyago said. He added that inflation expectations were trending higher.

Ahead of the announcement, economists were split over whether SARB would increase interest rates again, with the decision expected to be a close call.

Investec chief economist Annabel Bishop expected a 25 basis-point increase on balance, although she put the probability at only just above 50%. She noted that the targeted measure of inflation was not yet spiking up and the oil price was very volatile, “as is the situation in the Middle East”.

Bishop added that the forward rate agreement curve was pricing in close to an 85% chance of a 25 basis-point increase and had fully priced in a second increase by the end of the year.

Standard Bank Group head of South Africa Macroeconomic Research Dr Elna Moolman also expected the SARB could increase rates by 25 basis points but said this could mark the end of the hiking cycle.

“We think that the Reserve Bank could very well hike interest rates by another quarter point, but then this could very well be the end of the hiking cycle with rates then remaining at these levels for a while before we expect the Reserve Bank to start providing some interest rate relief during the course of 2027,” Moolman said.

PSG chief economist Johann Els, however, believed there was enough reason for the MPC to leave rates unchanged, pointing to inflation trends, lower inflation expectations and a stable rand. “It is still going to be a very close call this afternoon.”

Els said the August inflation figure, released earlier today, would not have influenced the decision because the MPC had completed its forecasting and modelling last week. “The MPC concluded its forecasting and modelling runs last week already and have probably already made the right decision before the release of the CPI figure,” Els said.

August inflation edged up to 4.4% from 4.3% in July, while prices were unchanged month-on-month.

For heavily indebted households, another increase would add to pressure after the May hike.

René Moonsamy, director at National Debt Counsellors, said many households had already made several adjustments to their finances and had little flexibility left. “The greater risk is not optimism about rate cuts but that many households have already made several adjustments and have very little flexibility left,” Moonsamy said.