The South African Reserve Bank has raised the interest rate for the first time since 2023, warning that escalating tension in the Middle East, rising oil prices and climate-related food risks could trigger a fresh wave of inflation.
Reserve Bank governor Lesetja Kganyago announced on Thursday that the monetary policy committee had increased the repo rate by 25 basis points to 7%, effective from 29 May.
Four members of the committee supported the increase, while two preferred leaving the rate unchanged.
The move is expected to increase borrowing costs for households and businesses struggling with high food, fuel and electricity prices. Commercial banks are expected to raise the prime lending rate in line with the increase.
This is the first interest rate hike since May 2023, when the Reserve Bank last increased the repo rate during its tightening cycle.
The Reserve Bank said on Thursday that the decision came amid growing global uncertainty after the worsening crisis in the Middle East and disruptions around the Strait of Hormuz — a critical global oil shipping route.
“Oil prices have fluctuated around 100 dollars per barrel,” Kganyago said.
The bank warned that higher fuel prices were feeding into inflation, with fuel inflation jumping by 11.4% after falling sharply in March.
Consumer inflation rose to 4% in April, from 3.1% previously, driven mainly by energy costs and rising services inflation.
Kganyago said the bank was increasingly concerned that the initial shock from higher fuel prices could spread more broadly through the economy, pushing up wages, transport costs and inflation expectations.
“The challenge of large and overlapping shocks would likely trigger second-round effects,” he said.
The bank also flagged climate-related risks, warning that severe floods in parts of the Western Cape, Eastern Cape and North West had caused significant damage, while a developing El Niño weather pattern could increase drought risks and place further pressure on food prices.
“The frequency of these extreme weather events underscores the threat from climate change,” Kganyago said.
The bank has revised its inflation forecasts higher, projecting headline inflation to average 4.4% this year and 3.7% next year before returning to its 3% target in 2028.
The Reserve Bank has lowered its growth forecasts for the next two years, warning that higher global uncertainty and reduced disposable income would weigh on household spending and investment.
Despite the weaker outlook, the central bank said the country’s economic recovery remained resilient, pointing to a recent positive outlook revision by Moody’s and ongoing domestic reforms.
Kganyago said the bank’s economic models projected a further interest rate hike this quarter before rates gradually eased again as inflation slowed. However, he stressed that future decisions would depend on incoming economic data and the balance of risks.
The Reserve Bank explored several risk scenarios during its meeting, including a prolonged Middle East crisis, rising food prices linked to El Niño and the possibility that inflation shocks could have larger-than-expected effects on consumers.
Under its worst-case scenario, inflation could rise above 6%, requiring three additional interest rate hikes.
“We have already had one global inflation surge this decade and we may well be starting another,” Kganyago warned.
He said the Reserve Bank remained committed to bringing inflation back to its 3% target over time.
Efficient Group director and chief economist Dawie Roodt said the SARB had two choices: to wait and see how inflation developed before acting or to respond immediately.
“The first one is not to do anything and to wait and see what’s going to happen to actual inflation and then decide what to do.
“The option that the Reserve Bank, however, decided upon was to increase straight away and then wait and see what’s going to happen. And that is the right approach because they’re sending a very important but strong signal to the markets — that we are not going to tolerate an increase in prices.
“They’re not going to do much about inflation — that is a given now — but they’re going to start going to address a possible increase in inflation expectations and that’s behind this decision … The sooner they start, the less they might have to do.
“Now they’ve increased interest rates, depending of course on what happens, means that a further increase will not be necessary or further increases will not all be necessary because they are trying to address inflation expectations at the beginning of the cycle before it becomes entrenched. That’s the right decision.”
For consumers, the impact would be painful but preferable to sustained high inflation. “It’s going to affect economic growth, it will lead to higher levels of unemployment and poverty but I can promise you it’s not as bad as having all these things and high inflation.”
The Institute for Economic Justice (IEJ) criticised the bank’s decision, calling it “baffling” and arguing that leaving rates unchanged would have shown “flexibility and patience”.
It said a more developmental approach would reduce borrowing costs, support investment and help create jobs.
The group argued that inflation was being driven mainly by supply-side factors rather than demand. “Externally-fuelled energy, food, administered prices, insurance and transport costs overwhelmingly drove inflation,” the IEJ said.
The IEJ warned that higher interest rates in response to fuel-driven inflation “amounts to punishing households and firms already constrained by Eskom’s April 2026 electricity tariff hike, failing logistics infrastructure, concentrated food value chains and facing malnutrition”.
South Africa’s weak economic conditions limit the impact of monetary tightening pointing to high unemployment, low investment and rising household debt.
The IEJ noted that the recent tightening cycle had added significant pressure on households, with “thousands of rand in additional annual costs for bond-holders, vehicle-finance borrowers and indebted households.”
The Reserve Bank, it argued, was relying too heavily on interest rates to manage structural challenges. “Defending the rand mainly through high rates is costly and incomplete,” it said, calling for a broader policy approach involving industrial policy, development finance and investment in productive sectors to address inflation at its source.
South African Reserve Bank raises interest rate to 7%, warning that oil shocks, food inflation and global instability could drive prices higher