South African Reserve Bank (SARB) Governor Lesetja Kganyago stated that the central bank would respond to persistent inflationary pressures stemming from the US-Israeli war on Iran if they prove to be long-lasting. Speaking in Soweto, Kganyago noted that while the central bank initially treats such shocks as temporary, a prolonged conflict would necessitate action. This comes as inflation expectations have begun to drift away from the central bank's target.
Kganyago further elaborated that policymakers are observing early signs of second-round inflation effects as underlying price pressures build. He emphasized the necessity for the central bank to act, noting that when interest rates were hiked by 25 basis points to 7% in May, the latest inflation expectations were not yet available. Now, with expectations showing that price setters anticipate higher inflation, the SARB is committed to reining in these expectations to bring inflation back to its 3% target. Core inflation, excluding volatile elements like food and oil, rose to 3.8% last month from 3.6%, and overall inflation accelerated to 4.5% from 4%.
Despite an earlier US-Iran deal that temporarily eased some pressure by resuming oil flows, Kganyago cautioned that oil prices are unlikely to return to pre-conflict levels soon, with many analysts expecting elevated prices into the next year. He also defended the central bank's rate hike, explaining that waiting for complete proof of second-round effects would be too late, as monetary policy operates with lags. The SARB increased its key policy rate by 25 basis points, citing intensified inflation risks from higher oil prices due to the Middle East war. He highlighted that the Middle East conflict has damaged infrastructure and depleted stocks, ensuring sustained higher prices for Gulf products like oil, and that food prices are also deteriorating due to fertilizer shortages and reliance on diesel in agriculture.
Kganyago reiterated the SARB's commitment to returning inflation to the 3% target, stating, "Let there be no doubt, the South African Reserve Bank will be getting inflation back down to 3%." He expressed confidence that the bank’s history of meeting its targets would make this promise convincing. The central bank plans to carefully monitor incoming data to guide future rate decisions, particularly concerning potential second-round effects of inflation, and has warned that further interest rate hikes could be necessary.
