Reserve Bank keeps repo rate unchanged, warns the future remains uncertain

2026-03-26 - 14:30

The monetary policy committee (MPC) of the South African Reserve Bank (Sarb) has decided to keep the repo rate unchanged at their second meeting of the year, citing it remains uncertain what the future holds due to the Middle East conflict. Announcing the decision on Thursday, Governor Lesetja Kganyago pointed out that the more the war lasts, there higher chances are of inflation rising. “The decision was unanimous.” He said the level of restrictiveness has moderated. However, going into this meeting with all the data they had, together with the assessment of the outlook and the risks, they saw it fit to keep the repo rate unchanged. Middle East conflict influences decision “Since our last meeting, the key event has been the outbreak of conflict in the Middle East,” said Kganyago. “Prices for commodities like oil, gas and fertiliser have moved sharply higher.” He highlighted that it is due to this shock conditions remain extremely uncertain. Global inflation is expected to be higher in the near term, while growth will probably suffer from supply-chain disruptions and rising costs. “But the longer-term outlook is less clear,” he said. “Leading central banks have generally kept rates unchanged, as they await more information. Markets have largely dropped expectations for rate cuts in major economies, and probabilities of rate hikes have risen.” War to interrupt SA growth Kganyago highlighted that despite being encouraged by green shoots such as rising confidence and stronger investment, the ongoing war could interrupt the country’s growth recovery. “Turning to South Africa, the latest data show the economy grew further in the fourth quarter of 2025, with output rising by 1.1% for the year as a whole,” he said. “This is better than in recent years but still well below longer-run averages.” Moving to inflation, he touched on the fact that inflation was 3.0% for February, with core inflation also at 3.0%, precisely in line with the Sarb’s target. Energy prices to increase inflation He warned that higher energy prices will raise inflation in the near term. “We expect headline will soon accelerate to around 4%, with fuel inflation over 18% for the second quarter. Our baseline forecast then has a gradual unwinding of the shock, taking inflation back to 3% late next year.” Kganyago said the Middle East conflict is a clear instance of a supply shock, which raises prices while weakening demand. “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.” Achieving inflation target He added that getting policy right means ensuring that the price response to supply shocks is transitory and not persistent. “It is always difficult to assess second-round effects in time. Waiting for clear evidence risks leaving the policy response too late,” said Kganyago. “We therefore rely on forecasts, as well as indicators like wages and inflation expectations, to judge if there is a broader build-up of inflation pressure. “When we adopted the new 3% inflation target, we were 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. “Nonetheless, all our 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.” Expected approach Neil Abernethy, spokesperson for Tyson Properties, says the wait-and-see approach adopted by the MPC meeting was to be expected given the global turbulence since February due to conflict in the Middle East. Abernethy noted concerns that an extremely high fuel increase and resultant increases in food and service prices will put pressure on household disposable incomes. But he views rates remaining the same, at 6.75%, during what are particularly uncertain times, as a positive sign. “What we are unlikely to see is a repo rate increase as all are aware that we need to make it as easy as possible for South Africans to ride out this unfortunate period,” he said. “As things stand, even at $100 per barrel, the high oil price is unlikely to put too much pressure on the Reserve Bank’s new 3% inflation target and its one-percentage-point tolerance band.”