Why the Sarb can’t afford to wait

South Africa’s inflation story has taken a turn.

After months of steady decline, supported by a firmer rand and disinflationary tailwinds imported from global markets, consumer price inflation (CPI) rose to 4% year-on-year in April, up from 3.1% in March. Core inflation also nudged higher, moving from 3.2% to 3.6%.

The numbers are not alarming on their own, but they arrive at an awkward moment for the South African Reserve Bank (Sarb) and, in my view, present it with a genuine conundrum.

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The Reserve Bank only recently shifted its inflation target to 3% – a move reaffirmed by National Treasury in the final quarter of last year. Until recently, the trajectory was cooperating.

Now, a supply shock, principally in energy, has flipped the script, and the risk of food inflation building later in the year is sharpening the question of how the central bank should respond.

The intuitive view is that supply shocks are exogenous events: they sit outside the Sarb’s control, they fade, and raising rates will not change the price of petrol at the pump.

So why act at all? That is not, in our view, how the governor and his team are thinking about the problem.

You don’t wait to see second-round effects coming through from a supply-side shock. You act early.

Acting early means that, in the long run, you have to hike less, and you have a smaller impact on the economy.

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This has been the consistent message from Governor Lesetja Kganyago’s recent public appearances, and it is a discipline the Sarb applied in 2022. With the benefit of hindsight, that approach appears to have been the correct one.

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On that basis, we expect the Sarb to raise interest rates by 25 basis points at the May Monetary Policy Committee (MPC) meeting on Thursday, with the possibility of one or two further hikes in the cycle if the impact of the Middle East war broadens.

The aim is not to wrestle a single inflation print into submission, but to anchor expectations before the supply shock seeps into wage settlements, pricing decisions and the broader behavioural fabric of the economy.

That is where the real risk sits.

Inflation at 4% is uncomfortable, but not catastrophic. It remains below the midpoint of the old 3% to 6% target band (and within the new 2% to 4% tolerance range), even if that band no longer defines the Sarb’s mandate.

The bigger concern, in our view, is what happens to inflation expectations.

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The May meeting will be held without the benefit of an updated expectations survey, but the next release will be closely scrutinised. If expectations drift upward, it would signal that second-round effects are taking hold – and that is the point at which the central bank’s tolerance narrows quickly.

Markets, for their part, have already moved. A 25-basis-point hike in May has been priced in for some time, and recent volatility has, if anything, added to that conviction.

A sharp reversal in oil prices, perhaps triggered by an easing of geopolitical tensions and a reopening of the Strait of Hormuz, could change the calculation. South African rates can react quickly to good news as well as bad.

But we are cautious about how much hiking the market is now pricing in.

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Our base case is for average inflation of 4.5% in 2026, declining through 2027, with a peak above 5% in the fourth quarter of this year.

Against that backdrop, more than a full percentage point of hikes would push real rates into restrictive territory, arguably further than the inflation outlook warrants if oil prices correct and the trajectory turns over as expected.

For portfolio positioning, the implications are practical. Our analysis flagged the upside inflation risks early, particularly in food prices, ahead of the energy supply shock.

That early warning translated into a deliberate underweight to shorter-dated bonds in the Ninety One Diversified Income Fund, which are most sensitive to the kind of rate-hike repricing now playing out. A shift from nominal bonds into inflation-linked bonds also benefited the fund.

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Kganyago sees inflation around 3% in 2026

The April CPI print was in line with our expectations and did not prompt a fresh shift, but our cautious stance on duration, especially at the front end of the curve, remains in place.

The situation remains fluid, and much like the Reserve Bank, we remain data-dependent and stand ready to act on opportunities that arise in the market during this volatile period. The broader message, for us, is one familiar to anyone who has watched the Sarb navigate previous cycles.

Central banks earn their credibility in moments like this, when the temptation is to look through a shock and the discipline is to act before the damage compounds.

That is precisely why we believe the front end of the curve still warrants caution, and why early action, however unwelcome in the short term, tends to be the lower-cost path over time.

Adam Furlan is portfolio manager at Ninety One.

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