South African Reserve Bank raises repo rate to 7% amid rising inflation risks
The South African Reserve Bank has increased the repo rate by 25 basis points, warning that global instability, rising fuel and food costs, and possible El Niño conditions could keep inflation elevated for longer.
The South African Reserve Bank (SARB) has increased the repo rate, effective from May 29, as inflation risks continue to intensify both globally and domestically.
SARB governor Lesetja Kganyago announced the decision during a media briefing on Thursday, saying four members of the Monetary Policy Committee (MPC) voted in favour of the increase, while two supported keeping rates unchanged.
Kganyago said the MPC acted in response to mounting inflation risks and concerns that overlapping global and local shocks could trigger broader price increases across the economy.
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“The committee acted because inflation risks had intensified and overlapping shocks could trigger second-round effects,” he said.
Risk scenarios considered
Kganyago said the MPC evaluated three major risk scenarios during its deliberations.
The first involved a prolonged conflict in the Middle East, which could push global oil and food prices higher while weakening the rand.
The second focused on the possible development of El Niño conditions, which could lead to drought and place additional pressure on agricultural production in South Africa.
The third scenario examined so-called non-linear effects, where large economic shocks feed more aggressively into consumer prices as businesses pass increased costs on to consumers.
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According to Kganyago, all three scenarios pointed to higher inflation and weaker economic growth.
“The scenario with a longer Strait closure has inflation at about 5%, with two more hikes than the baseline. With El Niño added, rates stay high for longer. The most adverse scenario puts all the risks together, causing inflation to peak above 6%, requiring three extra hikes,” he said.
He added that food and fuel remain key channels through which geopolitical shocks affect the domestic economy, while a severe El Niño event could intensify inflationary pressures further.
Food and fuel costs under pressure
The MPC has also revised its oil price assumptions upwards and warned of renewed pressure on food inflation due to rising agricultural costs.
Kganyago said farmers are facing increased diesel and fertiliser costs, which are expected to filter through to consumers.
“Looking forward, we have raised our oil price assumptions. In addition, we see renewed pressure on food prices, with the agricultural sector facing higher costs for both diesel and fertiliser,” he said.
The central bank now expects headline inflation to average 4.4% in 2026 and 3.7% in 2027 before returning to the 3% target in 2028. Core inflation is also expected to rise, peaking early next year.
Inflation already trending upwards
Recent data already shows growing pressure on prices. Consumer inflation rose to 4% in April from 3.1% in March, largely driven by higher energy costs.
Fuel prices recorded a sharp reversal, dropping by 8.7% in March before increasing by 11.4% in April — one of the largest monthly increases on record.
Services inflation also climbed to 4.6%, exceeding the SARB’s 3% target, partly due to higher transport, insurance and financial services costs.
Kganyago said these trends reflect persistent inflationary pressures across the economy and reinforced the MPC’s decision to tighten monetary policy.
