Repo Rate Holds Steady at 6.75%

South African Reserve Bank Maintains Repo Rate Amidst Global Turmoil

The South African Reserve Bank (SARB) has announced its decision to hold the benchmark repo rate steady at 6.75%. This decision comes as the central bank navigates a landscape of heightened global uncertainty, significantly influenced by the recent outbreak of conflict in the Middle East and its potential ramifications for inflation and economic growth.

Reserve Bank Governor Lesetja Kganyago highlighted that leading central banks worldwide have largely adopted a similar stance, opting to maintain current interest rates while awaiting further clarity on the evolving geopolitical situation.

“The reality is, we are only a few weeks into this crisis. The coming months will be critical for assessing the longer-term inflation consequences,” Governor Kganyago stated during a media briefing in Pretoria. He further elaborated that current forecasts suggest an upward bias in inflation risks.

“Against this backdrop, the committee decided to keep the policy rate unchanged, at 6.75%. The decision was unanimous,” Kganyago confirmed on Thursday.

The Governor specifically addressed the ongoing Middle East conflict, characterizing it as a clear instance of a supply shock. Such shocks inherently lead to price increases while simultaneously dampening demand.

“The standard response to a supply shock is to look through first-round effects, which are unavoidable and cannot be stopped by interest rate changes. At the same time, central banks should be alert to second-round effects, where an initial shock triggers broad price increases. Getting policy right means ensuring that the price response to supply shocks is transitory, and not persistent,” he explained.

Domestic Economic Performance and Outlook

Turning to South Africa’s domestic economic performance, data indicates a continued expansion in the fourth quarter of 2025, with the economy growing by 1.1% for the full year. While this represents an improvement compared to recent years, it remains below longer-term historical averages.

“We have been encouraged by green shoots such as rising confidence and stronger investment, but the ongoing war could interrupt the growth recovery,” Governor Kganyago noted.

For the time being, South Africa’s growth projections remain largely consistent. Revisions to data have adjusted the 2025 growth figures downwards, making 2026 appear somewhat stronger by comparison. This recalibration partially offsets the impact of current global shocks. The SARB anticipates growth to reach approximately 2% over the next few years, although the outlook is now subject to downside risks.

Inflation Dynamics and Future Projections

Regarding price stability, inflation stood at 3.0% in February, with core inflation also recorded at 3.0%, aligning with the SARB’s target range.

“Higher energy prices will raise inflation in the near term. We expect headline inflation will soon accelerate to around 4%, with fuel inflation over 18% for the second quarter. Our baseline forecast then has a gradual unwinding of the shock, taking inflation back to 3% late next year,” Governor Kganyago projected.

In light of the pervasive global uncertainty, the Reserve Bank conducted an analysis of two alternative scenarios, both incorporating more adverse assumptions than its baseline forecast.

• Scenario 1: This scenario posits that the conflict lasts approximately two more months, with oil prices averaging close to US$100 per barrel during this period and the rand weakening by about 5% against the dollar.
• Scenario 2: A more extreme scenario envisions the conflict persisting for over a year, with oil prices remaining above US$100 per barrel and the rand depreciating by 10%.

In both these hypothetical scenarios, inflation is projected to be higher. The first scenario sees inflation exceeding 4%, while the second projects inflation surpassing 5%.

“Both call for higher interest rates this year, with one hike in the first scenario and several more in the other,” Kganyago stated. He further explained that inflation would subsequently decelerate as oil prices begin to ease and the monetary policy response takes effect. Under the first scenario, inflation is expected to return to target during 2027, while the second scenario indicates this will only occur in 2028. In both cases, initial economic growth would be weaker, followed by a degree of recovery.

Sustaining Macroeconomic Gains

Governor Kganyago emphasized that South Africa has achieved significant macroeconomic progress recently, marked by a lower inflation target, improved fiscal prospects, and steadier economic growth.

“Prudent monetary policy will help sustain these gains, despite difficult global conditions. Further support would come from reaching a prudent public debt level, lowering administered price inflation, and continuing structural reforms that raise potential growth,” he concluded.