The South African Reserve Bank announced on September 23 that it would increase its benchmark policy rate by 25 basis points to 7.25%, effective September 25. The decision received unanimous support from the monetary policy committee.

Alongside the rate adjustment, the central bank lowered its economic growth projection for this year from 1.4% to 1.2%, citing higher fuel costs and pressure from services sector prices as factors amplifying inflation risks.

Fuel price concerns drive up inflation expectations

Statistics South Africa reported on the same day that the consumer price index rose 4.4% year on year in August, up from 4.3% in July. Monthly gasoline prices fell 2.0% in August, while diesel prices climbed 3.1%.

The central bank noted that fuel prices are once again under upward pressure, predicting that headline inflation will exceed 5% later this year and into early next year, before returning to the 3% target level by around the end of 2027. Governor Kganyago emphasized that policy must guard against sustained price shocks spreading into a broader range of goods and services.

The bank observed that food and import prices remain relatively stable for now, but services inflation stays elevated, and longer-term inflation expectations continue to sit above the 3% target.

Growth slowdown accompanies unanimous rate decision

The South African economy contracted by 0.2% on a quarter-on-quarter basis in the second quarter. The central bank still expects economic activity to rebound in the second half of the year, yet it has revised its full-year growth outlook down to 1.2%.

This marks the second rate increase by the South African Reserve Bank this year: the policy rate was lifted to 7% in May, and then held steady at the July meeting. Unlike July's session, when four committee members favored keeping rates unchanged and two argued for an increase, the current 25-basis-point hike received unanimous backing.

The central bank's quarterly projection model indicates that the policy rate will remain broadly stable for the remainder of the year, while the bank stressed that this model path does not represent a predetermined interest rate decision.