Key Moments
- Commerzbank’s Volkmar Baur considers a 25 basis point rate increase by the South African Reserve Bank to 7.25% as virtually certain.
- The move would unwind one-third of the 2024-25 easing cycle, after inflation in June accelerated to 5% on surging fuel and higher core prices.
- Baur argues that the South African Rand’s outlook depends on how firmly the SARB maintains a hawkish stance and prioritizes its inflation target.
SARB Seen Reversing Part of Recent Rate Cuts
Commerzbank analyst Volkmar Baur expects the South African Reserve Bank (SARB) to raise its policy rate by 25 basis points to 7.25%, describing such a move as almost certain following the latest inflation data.
According to Baur, this anticipated adjustment would roll back a significant portion of the central bank’s recent easing. He notes that the policy rate had previously been cut from 8.25% to 6.75% over the 2024-25 period, and a 25 basis point hike would effectively reverse one-third of that rate-cut cycle in just two meetings.
Baur contends that the central bank is likely justified in taking this step in light of recent price developments.
Inflation Pressures Intensify on Fuel and Core Components
Baur highlights that the latest inflation figures have left little room for doubt about the need for tighter policy.
“If there were any doubts remaining, they should have been dispelled by the inflation figure released yesterday. It seems certain that the South African Reserve Bank (SARB) will raise interest rates again today by 25 basis points to 7.25%.”
He explains that geopolitical tensions and higher fossil fuel costs have interrupted, and in some cases reversed, previous disinflation trends. At an annual rate of 5%, consumer prices in June increased at their fastest clip in two years. A key driver has been gasoline, with prices up about 35% compared to the same period a year earlier.
Baur stresses that inflation is no longer confined to energy. The core inflation rate – which strips out energy and food – also climbed in June, rising at an annual pace of 4.1%, its highest in nearly two years. He underscores that this measure has moved above the upper boundary of the SARB’s target band of 3% ± 1.
| Indicator | Latest Value | Context |
|---|---|---|
| Policy rate before easing cycle | 8.25% | Starting point of 2024-25 rate cuts |
| Policy rate after easing cycle | 6.75% | Level reached following cuts |
| Expected new policy rate | 7.25% | Implied by a 25 basis point increase |
| Headline inflation (June, annual) | 5% | Fastest rate in two years |
| Core inflation (June, annual) | 4.1% | Highest in nearly two years, above target range |
| Gasoline price change (year-on-year) | about 35% | Main contributor to higher inflation |
Rand Outlook Tied to SARB’s Policy Resolve
In Baur’s view, the South African Rand (ZAR) will be heavily influenced by how determined the SARB remains in defending its inflation objective.
“For the ZAR, the key factor will be how resolute the SARB continues to be. At its last meeting, the SARB announced that, if necessary, it would raise interest rates three more times to defend the inflation target.”
He observes that, with the geopolitical backdrop having improved in the meantime, assessing future conditions has become more challenging. Against that uncertainty, Baur believes that maintaining a firmly hawkish communication stance and keeping the inflation target at the core of the central bank’s strategy would likely be the most supportive outcome for the currency.
“Now that the geopolitical situation has improved in the meantime, it is likely more difficult than before to assess future developments. A continued hawkish tone, keeping the inflation target at the center of the central bank’s efforts, would therefore probably be best for the ZAR.”
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