Sarb expected to sit tight as oil spike reshapes inflation outlook

After weeks of heightened global tension and a surge in oil prices, the South African Reserve Bank (Sarb) is expected to resist any knee-jerk reaction and keep its repo rate unchanged at 6.75% on Thursday (26 March).

Globally, hopes of further interest rate cuts have faded as the spike in oil prices and renewed geopolitical tension in the Middle East complicate the inflation outlook.

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The closure of the Strait of Hormuz following US and Israeli strikes on Iran has driven Brent crude above $100 a barrel, forcing central banks to rethink their inflation outlook for the year ahead.

Global backdrop shifts

David Rees, head of global economics at Schroders, says the global picture has shifted materially, but warns that markets may have moved too quickly to price in aggressive monetary policy responses to the conflict.

“Central banks were never going to deliver the rate hikes that markets have been quick to price in since the eruption of conflict in the Middle East earlier this month,” with policymakers instead adopting a “cautious tone”.

Rees warns that the biggest risk to Schroders’s baseline forecast is the re-emergence of inflation.

Oil prices of over $100 per barrel meaningfully change the calculus on inflation, he says, and could add around one percentage point to headline CPI rates across developed markets.

Inflation risks in SA

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In South Africa, a net importer of refined fuel, higher oil prices quickly feed into domestic petrol prices, transport costs, and ultimately broader inflation.

Nolan Wapenaar, head of fixed income at Anchor Capital, says the key issue is not just the initial oil price spike, but how long it lasts.

Elevated energy costs are likely to place upward pressure on inflation, particularly through fuel and transport costs, with knock-on effects across food, manufacturing and services.

Independent economist John Loos flags an additional risk – fertiliser supply disruptions, as much of the world’s fertiliser moves through the Strait of Hormuz.

“For South Africa, which imports a large share of its fertiliser, this raises the prospect of further food price inflation.”

February CPI slowed to 3%, in line with the Sarb’s target, but this was before the Middle East conflict escalated, Loos cautions. “As a result of this conflict, the inflation risk environment has changed dramatically.”

Loos expects the Sarb to look beyond the direct impact of higher fuel prices and focus on second-round effects across the economy.

Fuel is a key input cost for many industries, meaning price increases tend to spread more widely over time.

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For now, however, he believes the Sarb will hold rates. It is still early days, and the full inflation impact remains uncertain.

“My base case, however, is for a solution to be found for the Strait of Hormuz supply disruptions in the near term, and for the Reserve Bank to keep interest rates unchanged through the rest of the year, as a manageable near-term inflation uptick works its way through the system.”

Wait-and-see stance

Albert Botha, head of fixed income at Ashburton Investments, highlights how sharply market expectations have shifted.

Interest rate pricing has swung from anticipating cuts to pricing in hikes, reflecting the sudden change in the global environment.

Despite this, Botha expects no change at this week’s meeting. “Rates will likely remain unchanged at this meeting: the crisis could unwind as quickly as it escalated, and most central banks remain in a wait-and-see mode.”

He adds that with inflation still around 3%, the Sarb has some room to pause.

The governor’s recent cautious stance is effectively “buying himself time” as uncertainty plays out.

Old Mutual Wealth investment strategist Izak Odendaal agrees that a hold is the most likely outcome. South Africa entered this period with relatively benign inflation, with both headline and core inflation at 3% in February, he says.

However, the outlook has shifted quickly. Petrol prices are expected to rise sharply in the coming months, with a roughly R5 per litre increase likely to push petrol inflation from -10% year-on-year in February to around 20% in April.

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While fuel has a relatively small direct weight in the CPI basket, the broader impact lies in how higher transport costs filter through the rest of the economy.

Raising rates could be a ‘policy error’

Still, Odendaal believes it is “far too early” to talk about rate hikes.

“Given the absence of pre-existing inflationary pressures and the need to water South Africa’s economic green shoots, raising interest rates could well be a policy error, akin to again fighting the last war,” Odendaal adds.

Speaking on the MoneywebNOW podcast, PwC chief economist Lullu Krugel says the Sarb will likely keep its options open – with inflation risks expected to dominate discussions at the Monetary Policy Committee meeting, but no immediate action anticipated.

“I do not think we will see any changes now. We will see them in a wait-and-see pattern,” she says. If conditions worsen by the May meeting, a rate increase could come into consideration.

Standard Bank chief economist Goolam Ballim echoes this view. In an interview on Moneyweb’s The Property Pod, he says even though expected rate cuts for the year are now off the table, the Sarb is unlikely to react hastily and may opt for a pause rather than an overly reactive move on Thursday.

Read: Morgan Stanley says South Africa to stay on prolonged rate hold

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