Morgan Stanley sees SA rate hike in May amid Iran war

South Africa’s central bank is likely to go on the offensive against inflation and raise interest rates as soon as its next meeting in May, according to Morgan Stanley.

The South African Reserve Bank held rates at 6.75% on Thursday, but stressed the Iran war is clouding its inflation outlook and opening the door to hikes if the conflict drags on.

“We now see a pre-emptive tightening cycle unfolding in the months ahead,” Morgan Stanley economist Andrea Masia said in a note seen by Bloomberg. He penciled in 25 basis-point rate hikes in May and July, before the Sarb pauses and resumes easing in 2027.

Lesetja Kganyago

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Oil prices have surged 50% since the US and Israel attacked Iran on February 28, forcing central banks around the world who had been easing policy to pivot. The Sarb adopted a 3% inflation target last year and Governor Lesetja Kganyago emphasised it would defend that goal.

“All our forecasts show inflation reverting to 3% during the next two years,” he told reporters during a press conference in Pretoria after the rate decision. “We are committed to delivering that outcome, and stand ready to act as needed to fulfill our mandate.”

Morgan Stanley sees headline inflation overshooting the 4.3% April peak forecast by the Sarb and expects it to be closer to 4.6% as price pressures broaden and energy costs filter more persistently through the economy.

The tone of the statement also suggested to Barclays analyst Michael Kafe that a rate hike may be on the cards in May if oil prices remain above $100, though he wrote in a client note that his view for now was the Sarb staying on hold through 2026.

The central bank’s baseline outlook assumes crude prices will ease relatively quickly, averaging about $78 a barrel this year before declining further. That would allow policymakers to keep rates on hold through much of 2026 and begin cutting in 2027.

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Still, the Sarb laid out two less optimistic scenarios in which oil prices remain higher for longer and the rand is weak, with both of them calling for tighter policy. If the conflict lasts another two months, the bank’s calculations see one quarter-point hike, while rates peak around 8.25% if the war lasts for a year.

Analysts at BNP Paribas said that the central bank “leant hard” into the scenario analysis as a way to spell out to investors under what circumstances it would change its policy stance and that if the war is still raging, a hike will be on the table when the MPC meets in May.

“We think in such an instance a 50 basis-point ‘opening gambit’ hike is more likely than a 25 basis-point move,” they wrote in a client note.

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