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The South African Reserve Bank (SARB) will hold its Monetary Policy Committee (MPC) meeting this Thursday, with most economists and markets expecting a 25-basis point interest rate hike.

That would take South Africa’s repo rate from 6.75% to 7.00%.

The expected hike follows last week’s inflation print, which showed consumer inflation rising to 4.0% year-on-year in April, up from 3.1% in March, according to Statistics South Africa.

The figure was dead in line with the forecast made by The Common Sense in-house economist Bheki Mahlobo.

The increase places inflation above the SARB’s preferred 3.0% target, but still inside the central bank’s 1.0% tolerance band above that target.

Mahlobo has cautioned, however, that the MPC may still decide to hold the repo rate steady at 6.75%, putting him at odds with the consensus view among most economists and markets.

He said two local markers were signalling a hike.

The first was the balance of economists, who appeared to be pencilling in a rate increase. The second was the forward rate agreement (FRA) market, which was signalling roughly one 25 basis point increase over the next month.

FRAs are financial contracts used by banks, pension funds, insurers, asset managers, and large companies to hedge against future interest rate movements. Because real money is placed behind those contracts, FRA markets are closely watched as a live signal of where professional investors think interest rates are likely to move.

Central banks usually raise interest rates when they are worried that inflation is becoming too high or too persistent. Higher rates make borrowing more expensive and saving more attractive. The aim is to cool demand in the economy, slow spending, and reduce pressure on prices.

A rate hike can also support the currency. Higher interest rates can attract investors looking for better returns, which may strengthen the rand. A stronger rand can help lower the cost of imported goods, fuel, and other dollar-priced products.

For borrowers, however, the effect is usually painful. Homeowners with variable-rate bonds may see their monthly repayments rise. Consumers with vehicle finance, credit cards, overdrafts, or personal loans also face higher debt costs. Businesses that rely on credit to fund operations or expansion may delay investment, hiring, or growth.

Prime is the benchmark lending rate that commercial banks use when pricing loans to customers. In South Africa, the prime lending rate normally moves when the SARB changes the repo rate. The repo rate is the rate at which the Reserve Bank lends money to commercial banks. When the repo rate rises, banks usually raise prime. When the repo rate falls, banks usually cut prime.

Many loans are priced as prime plus or prime minus. If prime is 10.25% and a home loan is priced at prime plus 1%, the borrower pays 11.25%. If the SARB hikes by 25 basis points and banks raise prime to 10.50%, that same borrower’s rate rises to 11.50%. Prime is therefore the base rate, while the extra 1% is the borrower’s margin above that base rate.

For example, assume a homeowner has a R1 000 000 variable-rate bond over 20 years, priced at prime plus 1%.

If prime is 10.25%, the borrower pays 11.25% on the bond. That works out to a monthly repayment of roughly R10 493.

If the SARB hikes rates by 25 basis points, and prime rises to 10.50%, the borrower’s rate rises to 11.50%. The monthly repayment then rises to roughly R10 664.

That means a 25-basis point hike would add about R172 per month, or roughly R2 060 per year, on a R1 000 000 bond.

For households with larger bonds, the effect scales up. A R2 000 000 bond would see repayments rise by roughly R344 per month, while a R3 000 000 bond would rise by roughly R515 per month.

However, Mahlobo argues that the latest inflation pressure appears to be driven more by external shocks than by broad-based domestic overheating.

Although headline inflation has moved above the central bank’s target, it remains inside the tolerance band. Core inflation, which excludes food and fuel, has also risen, but remains closer to the SARB’s target than the headline figure.

Mitigating against a hike is that the central bank anticipated inflation reaching 4.0% in the second quarter of 2026 at its March meeting. Mahlobo said this suggests the SARB had already expected some upward pressure on prices while maintaining a relatively steady policy stance.

The rand’s strength may also matter. Despite elevated international oil prices, the currency remains nearly 8.0% stronger than it was a year ago, helping to offset some of the pressure from higher fuel costs.

Mahlobo’s key argument against a hike is that inflation and higher prices should not always be treated as the same thing. Inflation, properly understood, is caused when central banks increase the money supply faster than the economy grows, reducing the value of money over time. By contrast, price increases caused by external shocks, such as global oil prices, supply disruptions, or imported costs, cannot always be solved by higher interest rates.

A decision to hold rates could put pressure on the rand and may push it past R16.60 against the dollar, given that markets have priced in a 25-basis point hike this week. However, positive news on Iran may override that effect (higher rates may attract more investment into the rand causing it to strengthen).

Mahlobo said a 25-basis point hike would weigh on South Africa’s already weak domestic economy, while doing little to address supply-side inflation driven by fuel costs.