Rate hike on the cards as oil breaches $110, rand tanks to 3-month low

As February ended, the question on the minds of economists was not if the South African Reserve Bank (Sarb) would cut interest rates but rather when – March or May – it would apply the scissors.

Prospects for a rate cut soon have since been vaporised by the Israeli and US attacks on Iran and the Islamic Republic’s response, which has sent the price of Brent crude oil soaring past the $110-a-barrel mark and has the rand reeling against a resurgent dollar.

Sarb governor Lesetja Kganyago told Reuters in London last week that the bank was redrafting its “risk scenarios” for the next scheduled meeting of its Monetary Policy Committee (MPC), which will make its next interest rate announcement on Thursday, 26 March.

“We had our baseline (in the January meeting) and we had an optimistic scenario and an adverse scenario... (the previous adverse scenario) is gone – it was in the past... we will come up with a completely new one,” Kganyago was quoted as having said.

“The call that as a policymaker you must make is: is this transitory or is it persistent? And you only respond to the persistent, not to the transitory – and that is not an easy call to make.”

Indeed, with the Sarb determined to anchor consumer inflation at 3.0%, the chances for the next interest rate move being a hike have dramatically risen – though this may not happen next week.

The Bank’s repo rate is currently 6.75%, the prime lending rate is 10.25% and CPI was 3.5% in January on an annual basis.

With the closure of the Strait of Hormuz – through which about a fifth of the world’s oil supplies are shipped – and the conflict escalating, the oil price surged 35% last week and started this week with a bang.

WTI crude oil futures roared more than 30% higher at one stage on Monday morning, the largest one-day rise in almost five years to levels not seen since June 2022, according to Trading Economics.

This is a shock of note and combined with the rand’s mounting losses against the dollar (it has plunged from about 15.90/dlr on the eve of the conflict to almost 16.90/dlr in Monday trade) the implications for South Africa’s inflation outlook and the wider economy are grim.

Oil is priced in dollars so an increase in its price and a decline in the rand's value against the greenback is a double whammy.

When global oil prices rise and the rand weakens against the dollar, South Africa usually pays more for imported fuel, which pushes up the petrol price. Higher petrol prices then ripple through the economy by raising transport and operating costs, which can feed into food prices, inflation and pressure on household budgets.

Pain at the pump

“Basic estimates at this stage put a petrol price increase at over R3.00/litre and if the ZAR price of oil spikes further, that could rise. These calculations place inflation closer to 4% or above,” George Glynos, head of research at ETM Analytics, told Daily Maverick.

A R3-a-litre spike will take the retail unleaded 93 petrol price to about R23.30, within striking distance of its record high of R26.31 scaled in July 2022.

What this means for you

Just in time for the long Easter weekend in April, there will be a big spike in retail petrol and diesel prices – the question now is just how much.

This shock to South African motorists and the country’s inflation and economic outlook will not be dulled by the fact that the pain is being felt at a global level.

The cautious optimism around last month’s Budget and hope for interest rate cuts have now been dashed. In 10 days the economic world we live in has done a 180-degree turn.

“If above that, the Sarb will be forced to respond if it is to maintain its credibility as an inflation fighter. However, I am not sure that will happen as early as next week, although that too depends on where the ZAR price of oil surges to this week,” Glynos said.

The outlook is as murky as a bottle of Old Brown Sherry but one thing is gin-clear: a rate cut is now firmly off the table. And the tide may soon turn to the point where the debate centres on when, not if, the MPC hikes rates.

It hasn’t quite reached that tipping point yet but economists are now talking about the possibility.

“An oil price at $110/barrel, or higher, with the rand at R16.80/dlr or weaker, over the remainder of H1 2026 would push CPI inflation above 4.0% y/y in the second quarter of 2026, increasing the chance of an interest rate hike this year,” Investec chief economist Annabel Bishop said in a note on Monday morning.

Pointedly, Bishop said this was “not the expected case” – but none of this was expected on the last Friday of February.

In 10 days that have shaken global markets to their core, the economic outlook – global and domestic – has taken a dramatic turn for the worse.

Gold’s price remains elevated in record territory above $5,000 an ounce but it has not been given the lift from the boiling Middle East cauldron that one might have expected. The investor flight to safety and away from risky emerging market assets such as South Africa’s has beaten a path to the US dollar, boosting the greenback and sinking the rand.

The yield on South Africa’s benchmark government bond has spiked to above 8.50% from just under 8.0% at the end of February, raising borrowing costs. And the upheaval threatens to undermine forecasts for global and South African economic growth, which in turn may topple Treasury’s efforts to stabilise the country’s debt burden.

From an economic and markets perspective, March – to use an old northern hemisphere saying – has roared in like a lion and is unlikely to go out like a lamb.

And if the big cat’s claws are still unsheathed at the end of the month, it will only be a matter of time before the Sarb’s hawks bare their talons. DM