The South African Reserve Bank (SARB) delivered a widely expected 25 basis point(bps) hike at its May Monetary Policy Committee (MPC) meeting, lifting the repo rate to 7.00% from 6.75%. The decision was taken in a 4–2 split vote, marking the first rate increase since May 2023 and effectively ends the easing cycle that began in September 2024.
Governor Lesetja Kganyago confirmed that the MPC debated a larger 50bps increase but ultimately opted for a more measured 25bps move, preferring to see clearer evidence of second-round inflation spillovers before tightening more aggressively. Importantly, the discussion centred on the timing of further tightening rather than its direction further reinforcing that additional hikes remain firmly on the table.
The MPC statement highlighted that inflation risks have intensified, driven largely by global energy shocks and the potential for broad-based second-round effects. The SARB significantly revised its inflation outlook higher. Headline CPI is now expected to average 4.4% in 2026 (up from 3.7%) before moderating to 3.7% in 2027 and returning to 3.0% in 2028. Core inflation forecasts were also lifted, reflecting stronger services inflation and broader cost pressures. The bank assumed higher oil prices of around US$91/bbl for 2026, with risks flagged around wage-price pass-through and inflation expectations becoming unanchored. Inflation risks are assessed to be skewed to the upside, particularly if global supply shocks persist or broaden. Growth projections were revised lower, with GDP now expected at 1.2% in 2026 (down from 1.4%) rising modestly thereafter. The SARB noted that weaker consumer spending and investment, combined with global uncertainty will weigh on activity and widen the negative output gap slightly.
Scenario analysis by the SARB underscored heightened uncertainty. Prolonged geopolitical tensions, adverse weather shocks and stronger second-round inflation effects could each require additional tightening with extreme combinations implying up to three further hikes of 25bps.
Overall, the MPC’s tone signals growing concern about inflation persistence and second-round effects, alongside a clear willingness to tighten further if risks materialise. The SARB has their job cut out for them as they balance inflation control against weakening domestic growth momentum.