The South African Reserve Bank (SARB) hiked interest rates from 6.75% to 7.00% at its May Monetary Policy Committee (MPC) meeting yesterday, marking the first rate increase in two years.

Ahead of the meeting, The Common Sense had pointed out to our readers that most economists and market participants were pricing in a hike of 25 basis points, though the central bank could have held rates steady, given that inflation remained within its tolerance band and much of the recent price pressure stemmed from supply-side factors.

South Africa’s MPC, which has six members, votes on the preferred policy direction, with the majority determining the outcome. In this meeting, the decision was split: four members voted for a 25-basis point hike, while two preferred to hold rates, broadly in line with The Common Sense’s pre-meeting view that a credible case existed for no change.

The four members who opted for a hike were concerned that higher fuel and food prices could broaden into wages and inflation expectations, creating second-round effects. The SARB said its projections already include some of those effects, but that at this early stage it does not yet have clear confirmation of them in the data. Consumer inflation is now projected to average 4.4% in 2026 and 3.7% in 2027, before returning to the 3% target in 2028. The bank sees inflation risks tilted to the upside due to high fuel prices and adverse weather, including a potential severe El Niño, which could pressure food prices and household costs.

Bheki Mahlobo, in-house economist at The Common Sense, said: “South Africa is not facing demand-driven inflation, which is typically caused by strong credit growth, but rather supply-side pressure from fuel, food, and other external shocks. Based on the SARB’s language, the central bank may maintain a hawkish stance as inflation expectations sit at 4.5%, above the 3% target.”

Inflation expectations measure what households and businesses anticipate future inflation to be. They are important because they influence wage and pricing decisions, helping prevent a self-reinforcing cycle of rising prices. By anchoring expectations, the SARB aims to avoid these supply shocks translating into broader, persistent inflation.

Mahlobo added that inflation expectations had risen due to high international oil prices. Brent crude has since fallen to near $90 per barrel, down roughly 16% in May. Should the United States-Iran deal lead to an increase in oil tanker flows through the Strait of Hormuz, global prices could fall further, easing supply-side price pressures in South Africa and moderating inflation expectations, which may lead the SARB to reassess its interest rate outlook.