The South African Reserve Bank has raised its benchmark repo rate by 25 basis points to 7%, breaking a run of stability as a deepening Middle East crisis drives oil prices higher and reignites inflation.

The increase, effective 29 May, was backed by four members of the monetary policy committee, with two favouring no change, governor Lesetja Kganyago said. The committee judged that inflation risks had intensified and that large, overlapping shocks would likely trigger second-round effects requiring a policy response.

Hopes for a quick end to the crisis have faded, Kganyago said, with the Strait of Hormuz still largely closed and oil fluctuating around US$100/barrel. Global growth forecasts have been cut and inflation forecasts revised higher, leaving most central banks on hold and markets no longer pricing in rate cuts this year.

Locally, the shock is already feeding through. Consumer inflation rose to 4% in April from 3.1%, driven mainly by energy. Fuel prices jumped 11.4% after falling 8.7% in March – among the largest such swings on record – while services inflation accelerated to 4.6%, well above the bank’s 3% target, on pressure from transport, insurance and financial services.

The Reserve Bank now expects headline inflation to average 4.4% this year and 3.7% in 2027, returning to the 3% target in 2028. It has raised its oil-price assumptions and flagged renewed pressure on food prices as the agricultural sector absorbs higher diesel and fertiliser costs.

Growth forecasts for the next two years have been lowered. The economy had been gaining momentum before the shock, Kganyago said, but now faces higher uncertainty and squeezed disposable income, weighing on the investment and household consumption that have driven the recovery.

Three scenarios

He pointed to offsetting strengths, including Moody’s recent move to a positive outlook on the sovereign rating, elevated terms of trade and continuing reforms.

The committee modelled three risk scenarios – a prolonged Hormuz closure, an emerging El Niño drought and compounding non-linear effects – each implying higher inflation, weaker growth and further tightening. The most adverse pushes inflation above 6% and implies three more hikes.