South Africa’s central bank sees upside inflation risks, says markets pricing for hikes

PRETORIA, April 21 (Reuters) – South Africa’s central bank said on Tuesday that the Iran war presented material upside risks to the country’s inflation trajectory, with markets pricing in two interest ​rate hikes this year, but that it still expected inflation ‌to remain within the tolerance band of one percentage point above the 3% inflation target.

• The South African Reserve Bank said that it expects headline inflation to be higher in the near term and average 3.7% this year before easing ‌back ​to target by late 2027.

• In its ⁠twice-yearly Monetary Policy Review, the ⁠central bank said the energy shock was expected to affect but not derail the country’s transition to its 3% inflation target.

• “Uncertainty regarding the duration of the Middle East conflict, the extent of ​infrastructure damage and the magnitude of second-round effects skews risks to the upside,” it said.

• Inflation was at 3% in February, the ⁠latest available data showed, but this ⁠was before the Middle East conflict began.

• In its ​March monetary policy committee statement, the bank showed two scenarios for the ​inflation outlook, one “intermediate” and one “severe”.

• In the severe scenario, oil ‌remains above $97 per barrel for the year and inflation is expected to be sharply higher, and the inflation target will not be met within the forecast horizon, reflecting a larger and longer-lasting shock.

• The SARB ⁠also said market-implied interest rate expectations now suggest scope for about two 25 basis-point hikes this year. This contrasts with two cuts in 2026 ⁠that were anticipated just ‌before the conflict began.

• The SARB said that ⁠despite the uncertainty around the war’s duration, the ​country was ‌in a stronger position now than during the ​2022 energy ⁠price shock thanks to a lower inflation target and ongoing fiscal consolidation that had lowered the risk premium.

• The bank’s Monetary Policy Committee has held its key rate at 6.75% at every meeting this year since reducing it by 25 basis points in November 2025.

(Reporting by Kopano Gumbi; Editing ​by Hugh Lawson)