Interest Rates Kept Unchanged by SA Reserve Bank - Prime Rate Remains 10.25%
The South African Reserve Bank (SARB) has decided to keep interest rates unchanged amid heightened volatility in global financial markets caused by the conflict in the Middle East.
This leaves the repo rate at 6.75% and the prime lending rate at 10.25%. The decision was unanimous, with all six members of the MPC voting to hold.
The decision did not come as a surprise, as economists and analysts had anticipated the position.
Also in-line with market expectations, the central bank signalled possible rate hikes, if its baseline assumptions deteriorate.
The SARB joins a large number of central banks around the world that elected to freeze their rates as the United States’ war in the Middle East rages on.
The path for South Africa’s interest rates took a turn for the worse when the US and Israel launched attacks on Iran at the end of February 2026.
After the attack, which killed the Iranian Supreme Leader, the Middle Eastern nation retaliated with attacks on the region’s energy supply.
This led to significant volatility in global markets, including sharp rises in oil prices and increased risk-off sentiment, hurting the rand and South African assets.
The situation remains highly volatile, and South Africans are set for the largest petrol price increase in history next week, with petrol prices rising by over R5 per litre and diesel by R10 per litre.
This, in turn, has raised significant inflation concerns, with some economists anticipating a near-term spike in CPI to 4.5%.
These fears have been echoed by the Reserve Bank, with governor Lesetja Kganyago pointing to the heightened uncertainty and wait-and-see approach by major economies.
The governor said that market data and inflation expectation surveys still point to inflation heading towards the bank’s target—however, these were in the field before the war broke out.
As such the bank has to look at forecasts beyond this.
“The ongoing Middle East conflict is a clear instance of a supply shock, which raises prices while weakening demand,” he said.
“The standard response to a supply shock is to look through first-round effects, which are unavoidable and cannot be stopped by interest rate changes.”
“At the same time, central banks should be alert to second-round effects, where an initial shock triggers broad price increases.”
Getting policy right means ensuring that the price response to supply shocks is transitory, and not persistent, he said.
“It is always difficult to assess second-round effects in time. Waiting for clear evidence risks leaving the policy response too late.”
“The fact is, we are still only a few weeks into this crisis. The coming months will be crucial for assessing the longer-term inflation consequences,” the governor said.
Given current forecasts, the SARB sees inflation risks to the upside.
“In previous meetings, we warned of elevated risks, and we have been proceeding cautiously in our rate setting. Now that a crisis has hit, this prudent approach is proving appropriate,” he said.
Interest rate hike on the cards
The SARB’s latest forecasts from its Quarterly Projection Model show rates unchanged for a longer period, postponing the cuts from the January projections.
However, there are also warnings about possible interest rate hikes.
Given global uncertainty, the central bank is considering two scenarios—both of which see a rate hike on the cards for the country.
According to Kganyago, both scenarios have more adverse assumptions than the bank’s current baseline.
The first scenario assumes that the conflict lasts another two months or so, with oil prices averaging nearly US$100 per barrel for this period and the rand about 5% weaker against the dollar.
The second, more extreme scenario has the war lasting over a year, with oil prices staying above US$100 per barrel and the rand 10% weaker.
In both scenarios, inflation is higher, exceeding 4% in the first version and 5% in the second.
“Both call for higher interest rates this year, with one hike in the first scenario and several more in the other,” he said.
Inflation then slows as oil prices begin to ease and the policy response takes effect.
“In the first scenario, we are back on target by 2027. In the second scenario, this only happens in 2028. In both cases, growth is weaker initially, but there is some catch-up later,” he said.
Kganyago said that, when the bank adopted the new 3% inflation target, it was clear that achieving it could take a couple of years.
“Until recently, conditions were favourable, and it looked like we would get there fast. Now there has been a negative shock, and it could take a bit longer,” he said.
Nonetheless, all the bank’s forecasts show inflation reverting to 3% during the next two years.
“We are committed to delivering that outcome, and stand ready to act as needed to fulfil our mandate,” he said.