The South African Reserve Bank. (Photo: Waldo Swiegers / Bloomberg via Getty Images) The Iran war has just added another cost to South Africa’s hard-pressed consumers and another headwind to an economy that is barely growing.
The South African Reserve Bank (Sarb) hiked its key lending rate by 25 basis points on Thursday at the conclusion of the latest meeting of its Monetary Policy Committee (MPC). This takes its repo rate to 7.0% and the prime lending rate to 10.5%.
“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,” the MPC statement, read by Governor Lesetja Kganyago, said.
/file/dailymaverick/wp-content/uploads/2025/09/MTBS_Media-Briefing_082-copy-scaled-1.jpg "South African Reserve Bank Governor Lesetja Kganyago. (Photo: Leila Dougan)")
“Our forecast now has headline inflation averaging 4.4% this year and 3.7% next year, before returning to the 3% target in 2028.”
That puts the target — which looked to be well anchored in January — two years away, underscoring how the train smash of the Iran war has derailed the global and domestic economies.
South African consumer inflation surged in April to 4.0% from 3.1% on an annual basis in March — all because of the Middle East mayhem unleashed by US President Donald Trump and his sidekick in Israel.
“This was mostly due to higher energy costs. After falling by 8.7% in March, fuel prices increased by 11.4%. This is one of the largest jumps in fuel inflation on record,” the statement said.
During the media Q&A, Kganyago said that Sarb could do nothing about the sudden inflation spike in April or the expected one in May. This hike is about the future trajectory of inflation — it is pre-emptive, and Sarb has transparently signalled before that it was prepared to pull the trigger in advance to keep ahead of the curve.
The MPC’s inflation projections “entail some second-round effects, as the shock broadens out into wages and inflation expectations,” the statement said. But it said these effects are not yet clear from the data, which may explain why Sarb did not take a double-barrelled approach with a 50-basis-point hike.
The looming El Niño, which many scientists are forecasting could be on steroids, is also a focus of Sarb’s attention.
“Given elevated uncertainty, we continue to find value in scenarios. For this meeting, we explored three risks. One is a prolonged Middle East crisis, leading to higher food and oil prices, plus a weaker rand. The second included El Niño, a weather pattern that seems to be forming currently, and which typically brings drought to parts of South Africa,” the statement said.
“The third scenario added non-linear effects — basically the risk that big shocks have proportionally larger effects on inflation, with more costs passed on to consumers.”
And in the midst of this trifecta, El Niño looms large.
Double whammy
“All these scenarios imply higher inflation and lower growth. The scenario with a longer Strait [of Hormuz] 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,” said the MPC.
/file/attachments/orphans/GettyImages-2276222026_376172.jpg "Fishing boats sit idle on 17 May in the Strait of Hormuz. (Photo: Majid Saeedi / Getty Images)")
That would take the prime rate to at least 11.25%, further squeezing consumers and the economy in a double whammy.
“Higher interest rates increase borrowing and debt servicing costs for businesses, placing additional strain on cash flow — particularly for small and medium-sized enterprises that are more sensitive to changes in financing costs. At the same time, rising fuel and input costs continue to put pressure on margins, making the operating environment even more challenging,” said Oscar Siziba, a managing executive at Nedbank.
“The rate increase is also expected to weigh on demand, as consumers come under increasing financial pressure. This creates a difficult environment for businesses, with higher costs on the one hand and softer revenue growth on the other.”
What the interest rate increase means for your home loan
A homeowner with a R2-million bond at prime over 20 years would see their monthly repayment rise from about R19,633 to R19,968, an increase of roughly R335 a month or R4,017 a year.
Commenting on the interest rate hike, Jonathan Kohler, founder and CEO of Landsdowne Property Group, said the impact would be immediate for homeowners with bonded properties, in the form of higher monthly repayments.
“For buyers, affordability becomes tighter. For tenants, pressure builds as more households remain in the rental market for longer. For sellers, buyer decision-making becomes more cautious and more price sensitive,” he explained.
Toni Anderson, head of home services at Standard Bank, says the increase comes at a difficult time for consumers, with rising fuel prices already putting strain on household finances. However, the repo rate remains at a multiyear low of 7%. South Africa has experienced six interest rate cuts since July 2024, with rates reduced by a combined 150 basis points over the period.
“While this hike will disappoint many homeowners and people looking to buy property, earlier rate cuts have already made homes more affordable for many consumers. Understandably, consumers face a persistent strain from the rising fuel prices, which requires them to balance their budgets. But prioritising their home loan repayments remains critical,” says Anderson.
The decision comes at a time when households are already managing higher living costs. Food, fuel, transport, utilities, insurance, levies and maintenance are all placing pressure on monthly budgets. The rate increase adds another layer to that affordability equation.
What this means for prospective home buyers
For prospective buyers, a higher interest rate reduces purchasing power. “Some buyers will qualify for smaller bonds. Others will need larger deposits or will need to adjust their search to more affordable areas, smaller homes or properties with lower monthly running costs,” said Kohler.
However, he cautioned that buyers should not focus only on the purchase price. “The correct test is the full monthly cost of ownership. This includes the bond repayment, rates, levies, utilities, insurance, maintenance, security and transport,” he said. — Neesa Moodley
The bottom line is that the economy is on another rough ride, and El Niño hasn’t unsheathed its claws yet. DM
Additional reporting by Neesa Moodley