South Africa Poised for First Rate Hike Since 2023 on Iran War

Lesetja Kganyago Photo by Matt McClain /Photographer: Matt McClain/Bloom

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(Bloomberg) — South Africa’s central bank is set to raise borrowing costs for the first time in three years as policymakers seek to combat inflationary pressures stemming from the Iran war, including sharply higher oil prices.

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All but one of 19 economists surveyed by Bloomberg forecast Governor Lesetja Kganyago and the five other members of the monetary policy committee to lift the benchmark interest rate by 25 basis points to 7% on Thursday. The decision, due shortly after 3 p.m. in Pretoria, is expected to be split. 

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Traders are also pricing in a quarter-point increase on Thursday and at least one additional hike by year-end.

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An increase would see South Africa join a handful of central banks, including those in Indonesia and Mauritius, in raising interest rates while most policymakers stand pat to assess the war’s impact on inflation.

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With only fuel prices affected so far, no clear evidence yet of second-round effects from the Middle East oil shock, and food inflation remaining subdued, the decision is likely to be a close call, said Andrew Matheny, an economist at Goldman Sachs Group Inc., who expects policymakers to raise the benchmark rate by 25 basis points.

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“We expect that the policy statement will be accompanied by alternative scenarios that signal the South African Reserve Bank’s readiness to tighten policy more aggressively in the event of a larger shock and, or deterioration in inflation expectations,” he said. 

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Fighting erupted in Iran on Feb. 28 and disrupted traffic through the Strait of Hormuz, normally a key shipping route for about a fifth of the world’s seaborne oil and liquefied natural gas, which sent energy costs soaring.

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Gasoline prices in Africa’s largest economy were raised to a near four-year high this month, and the authorities have cut levies to cushion motorists against the impact. 

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Even so, South Africa’s inflation rate climbed to 4% in April from 3.1% in March, its highest level in 20 months. The central bank targets inflation at 3%, with a tolerance band of one percentage point on either side.

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Gasoline prices are set to hit a record next month as the government unwinds some of the temporary relief measures introduced after the conflict began.

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The central bank is also likely to raise its inflation forecast, which was previously projected to average 3.7% this year, to reflect a higher-for-longer oil price outlook and the prospect of a more protracted war, said Keabetswe Mojapelo, a macroeconomist at Rand Merchant Bank, who expects a 25 basis-point rate increase and sees a larger hike as unlikely.

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“The committee will want to look through the initial shock,” Mojapelo said. Policymakers would probably want to see firmer evidence of second-round effects extending beyond transport costs and becoming more broad-based across the inflation basket, he added.