PRETORIA, April 21 - South Africa’s central bank said on Tuesday that the Iran war presents material upside risks to the country’s inflation trajectory, while markets have shifted to price in two interest rate hikes this year. The bank maintained that it still expects inflation to remain within the tolerance band of one percentage point above the 3% inflation target.
In its twice-yearly Monetary Policy Review, the South African Reserve Bank (SARB) said it anticipates headline inflation will be higher in the short term, averaging 3.7% in the current year before easing back toward the 3% target by late 2027. The review described the recent energy shock as likely to influence the disinflation path but not to derail the country’s move toward the target.
The report highlighted the uncertainty created by the Middle East fighting and its potential domestic effects. "Uncertainty regarding the duration of the Middle East conflict, the extent of infrastructure damage and the magnitude of second-round effects skews risks to the upside," it said. The SARB noted that the latest available inflation data showed inflation at 3% in February, a reading that precedes the onset of the Middle East conflict.
The bank reiterated the scenarios it outlined in its March monetary policy committee statement, presenting both an "intermediate" and a "severe" pathway for the inflation outlook. In the severe scenario, oil remains above $97 per barrel for the year, inflation is projected to be sharply higher and the inflation target would not be met within the forecast horizon, reflecting a larger and longer-lasting shock.
On market expectations, the SARB said implied interest rate pricing now suggests room for roughly two 25 basis-point hikes this year. That view stands in contrast to market expectations observed just before the conflict, when two cuts in 2026 were anticipated.
The central bank also argued that South Africa is better positioned to absorb the shock than during the 2022 energy price spike. It pointed to a lower inflation target and ongoing fiscal consolidation that have reduced the risk premium, supporting a stronger starting position despite the heightened uncertainty over the conflict's duration.
Policy has remained unchanged at the Monetary Policy Committee this year, with the key policy rate held at 6.75% at every meeting since it was reduced by 25 basis points in November 2025.
What the bank set out
- The SARB expects headline inflation to average 3.7% this year and to return to the 3% target by late 2027.
- The bank described the energy shock as influential but not derailing the inflation-target transition.
- Market-implied interest rate expectations now suggest scope for about two 25 basis-point hikes this year; previously, two cuts in 2026 were priced in.
Context and constraints
The bank emphasised that risks are skewed to the upside due to uncertainty over how long the Middle East conflict will last, the potential scale of infrastructure damage, and possible second-round effects that could amplify price pressures. It also modelled a severe scenario in which sustained oil prices above $97 per barrel push inflation sharply higher and prevent the inflation target from being met within the forecast horizon.
Despite those risks, the SARB judged South Africa to be in a stronger position than during the 2022 energy shock, citing a lower inflation target and fiscal consolidation measures that have helped reduce the risk premium.
End of report.