Sarb stays the course on 3% inflation target, says Old Mutual

Despite surprising the market by keeping rates unchanged last month, the South African Reserve Bank (Sarb) remains committed to doing what is necessary to achieve its inflation target, says Izak Odendaal, investment strategist at Symmetry, an investment solutions arm of Old Mutual.

The market was taken aback when the Sarb’s Monetary Policy Committee (MPC) held its policy rate (formerly known as the repo rate) at 7%. This means the prime lending rate remains 10.5%.

Odendaal says a further rate increase had been expected, given higher inflation, geopolitical uncertainty and the oil price rising towards $100 a barrel ahead of the MPC meeting.

He says the US-Iran war and stop-start peace talks have created a difficult environment for investors and policymakers to navigate. In addition to elevated crude oil prices, a squeeze on global refinery capacity means that prices for refined products like diesel are even higher.

He says refined products typically cost $20 to $30 a barrel more than crude oil, but this spread has recently reached as much as $60 a barrel.

“Central banks are caught between the risk of overreacting to what might be a temporary rise in inflation due to the war, and the risk of letting inflation become entrenched,” he says.

“Many developed-market central banks made the latter mistake in 2021 and 2022 by not responding quickly enough to the post-pandemic global surge in inflation.”

Central bank responses

The Sarb and several other emerging-market central banks acted much sooner and were more successful in preventing runaway inflation.

So far, major central banks have responded cautiously to renewed inflationary pressures. In July, the European Central Bank, Bank of England, Bank of Canada, Bank of Japan and US Federal Reserve, among others, kept interest rates unchanged.

Unlike these central banks, Odendaal says the Sarb was in a favourable position before the war broke out. The policy rate was already elevated in real terms at the start of the year, while inflation was close to the 3% target.

He argues that the 0.25 percentage point rate hike in May was a bit premature, meaning the current policy rate is roughly where it should be.

Odendaal says the Reserve Bank remains committed to achieving the 3% inflation target over time, given that Governor Lesetja Kganyago led the push for a lower target and is likely to view its successful implementation as part of his legacy.

He says successful inflation targeting does not mean the target will be met every month or quarter. Rather, if inflation is knocked off course, it should eventually return to target since companies would not feel they can keep raising prices and workers keep pushing for higher wages.

Central banks cannot do much about supply shocks like higher oil prices, but they can act to keep inflation expectations anchored and bring inflation back towards target.

According to the widely followed Bureau for Economic Research survey of inflation expectations, the one-year inflation expectation rose from 3.6% to 4.4%, while the five-year expectation increased from 3.6% to 4.1%. The war has therefore had a significant impact on sentiment about future inflation, something the Reserve Bank will keep an eye on.

The July inflation print was lower than expected at 4.3%, and the rand has firmed a bit, reducing the likelihood of a rate increase at September MPC meeting, though fuel price pressures remain worrying. However, Odendaal says that the conversation is likely to turn to rate cuts in the new year.

“Whether there is another hike or not, this cycle will be muted compared to past interest rate cycles.”

Many people remain sceptical that 3% inflation is achievable. However, Odendaal points out that when the 3% to 6% inflation target was first introduced in 2000, there was also widespread scepticism, given the persistent double-digit inflation experienced over the previous three decades.

He believes Kganyago was right to push for a lower target. While this may mean some short-term pain for long-term gain, the benefits would include not only lower interest rates, but also a more competitive economy and a more stable exchange rate.

Decision-makers

This doesn’t mean the MPC will not get things wrong from time to time.

Introducing an external member to the committee could provide a fresh perspective, since all six current members are Sarb staff.

Four of the Bank of England’s nine MPC members are outsiders.

The Open Market Committee (FOMC), the US version of the MPC, comprises members of the Board of Governors in Washington DC and the presidents of the 12 regional banks – more people work in the Reserve Bank of New York, for example, than in the chair’s office in the nation’s capital.

This structure also means concerns that new US Federal Reserve chair Kevin Warsh could push a Trumpian agenda are likely overblown.

The European Central Bank may take this approach too far, with monetary policy decisions made by a Governing Council consisting of six members of the Frankfurt-based executive board and the governors of the national central banks of the 20 countries that use the euro.

South Africa

As for the domestic economy, the Sarb has slightly upgraded its growth forecast for 2026 to 1.4%. South Africa’s economy was in a better position to absorb this year’s global energy price shock, and the data on consumer spending has been relatively resilient so far.

July’s new vehicle sales numbers were robust, for example. Passenger car sales were 12.5% higher than last year’s level, according to industry body Naamsa.

“People only buy cars if they are confident about the economy and if banks are willing to extend credit, as the majority of cars are bought on credit.”

Credit extension to households continues to increase, but the Sarb’s latest quarterly bulletin – still an authoritative analysis of the economy – shows that incomes have broadly kept pace with debt. As a result, the ratio of household debt to nominal disposable income rose only marginally to 62.2% in the first quarter of 2026 from 61.8% in the previous quarter.

Many of us may feel that our debt burden is increasing, but the broader economic data suggests otherwise.

The Sarb says households’ debt-servicing costs relative to disposable income stood at 8.4% in the first quarter, broadly in line with the average level of the past decade.

South Africa’s trade balance remained in surplus in the first half of the year. Unlike some other countries, it therefore did not experience a balance of payments shock from higher oil prices.

Its trade surplus improved to R18 billion in June from R4 billion in May (revised from a R2 billion deficit). This was mainly supported by a recovery in export values rather than higher oil import costs.

The trade surplus for the first six months of the year was R109 billion, up from R81 billion over the same period in 2025, according to data from the South African Revenue Service.

However, despite historically high precious metal prices, the latest mining production data from Stats SA shows that the long-term stagnation in South Africa’s mining output continues, as the industry battles regulatory uncertainty, logistical bottlenecks and high electricity costs.

The surge in mining sales revenue is entirely due to higher prices, as production volumes have remained broadly flat over the past decade. Nevertheless, this has contributed to a trade surplus and a better fiscal outcome over the past year, including in the first quarter of the current financial year (April to June).

This, in turn, helped fund a temporary reduction in the fuel levy, offering a cushion against the fuel price shock in the second quarter. The improvement in government finances has also been recognised by the major credit rating agencies.

There are several signs that the economy is moving in the right direction over the medium term, says Odendaal, although unemployment remains the economy’s Achilles heel, and the poor performance of many municipalities is also becoming an economic headwind.

He points to the recent announcement of a private-sector concession to manage the Port of Cape Town – considered to be one of the worst performing ports in South Africa – as evidence that structural reforms aimed at increasing private investment and improving the business environment are continuing. A similar concession at the Port of Durban is already delivering positive results.

From an investor’s point of view, this means economic fundamentals are improving, while a structural shift towards lower inflation and interest rates over time should result in a rerating of domestic asset classes.

With local equities, bonds and property trading at reasonable valuations, the prospects for decent real returns over time remain.

Brought to you by Old Mutual Group Communications. 

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