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The Common Sense expects South Africa’s June inflation rate to show a rise when the data are released this morning, followed by a 25-basis point interest rate hike from the South African Reserve Bank (SARB) tomorrow as global oil price risks and a hawkish United States (US) Federal Reserve weigh on the central bank’s decision.

The Common Sense has placed a 65.0% probability that the SARB will hike interest rates in South Africa by another 25 basis points through a split decision, increasing the repo rate to 7.25%. The remaining 35.0% probability is assigned to a hold.

Bheki Mahlobo, the in-house economist at The Common Sense, said the SARB is confronting inflation pressures at home alongside tight monetary conditions abroad.

This morning’s headline annual inflation numbers in South Africa for June are expected to be 4.7%, compared to 4.5% in May.

The June inflation numbers will reflect the June fuel price, which was still based on an oil price of near $100. South Africa adjusts its fuel prices on the first Wednesday of every month and hence the benefit of lower June oil prices cannot be factored into the June inflation data.

On core inflation, which excludes volatile items such as food and energy, Mahlobo expects the reading to show an increase of near 4.0% for June, from 3.8% in May.

Looking ahead, July’s inflation data may ease to nearer 4% on the headline number because it will reflect a 7.2% drop in South Africa’s petrol price that was announced on 1 July and will not yet reflect the effects of the now again elevated oil price.

Mahlobo said that despite the outlook on South Africa’s inflation in July easing, there remain factors that will likely keep South African interest rates higher for longer.

He set out the following factors.

Both headline and core inflation will remain well above the SARB’s 3.0% target, signalling that the central bank will maintain its hawkish stance.

Inflation expectations from analysts, households, and businesses, which the SARB uses to help forecast where inflation is heading and to judge whether businesses and households will push prices and wages up in anticipation, also remain above the central bank’s target.

The oil price is again elevated as renewed strikes in Iran have caused the price of Brent crude to rise from $72.10 per barrel at the beginning of July to $90.70 this past Tuesday.

Mahlobo added that the SARB also faces external monetary policy pressure. The United States Federal Reserve (the American central bank, also known as the Fed) remains hawkish. Testimony by the chair of the Fed, Kevin Warsh, to Congress last week emphasised that US inflation remains well above the Fed’s 2.0% target and he described economic activity and the labour market as strong, while highlighting the extent of investment in artificial intelligence. A strong US economy mitigates against the possibility of a rate cut because policymakers would not think that the economy would need any interest-rate support. Warsh warned that easing US inflation in June did not justify a pivot away from the hawkish stance of the Fed.

A hawkish Fed puts pressure on the rand, which the SARB seeks to defend to anchor South African inflation numbers towards its target. The reason the SARB cares about defending the value of the rand is that if the rand weakens, the price of imported goods, especially fuel, increases, and this drives an overall rise in domestic prices. Policy-makers understand that any sharp increase in domestic prices would be politically dangerous as it would feed populism and phenomena such as xenophobic sentiment. To support the rand, the SARB will tend to increase interest rates, because this makes it relatively more attractive for foreign investors to buy into the South African currency, and the more demand for the currency, the better it retains its value.