WATCH: SARB hikes interest rate on back of higher inflation

The South African Reserve Bank (SARB) announced this afternoon that it would raise the prime lending rate by 0.25 percentage points, citing higher inflation. According to Statistics South Africa, inflation rose to 4.4% in August from 4.3% the previous month. SARB Governor Lesetja Kganyago explained that the hike comes as oil prices have increased again, leaving the country in an under-recovery situation.

He further predicted that headline inflation could reach 5% before easing to 3% by the end of 2027. Kganyago revealed that the economy's annual growth is expected to be 1.2% this year, with a more optimistic outlook in the medium term. However, he cautioned that growth risks are more likely to be negative. The governor also mentioned that drought pressures from El Niño may start to appear in South Africa, despite food inflation having been decreasing lately.

Inflation expectations are also trending upward. Some economists were divided on whether the SARB would increase interest rates further, with the decision expected to be a tight call. Investec's chief economist Annabel Bishop anticipated a 25 basis-point increase, albeit with a probability just above 50%. She pointed out that the targeted inflation measure had not surged yet, and the volatile oil price influenced the decision.

Standard Bank Group's head of South Africa Macroeconomic Research, Elna Moolman, believed the SARB could hike rates by 25 basis points, but this might be the end of the hiking cycle. PSG chief economist Johann Els believed the Monetary Policy Committee (MPC) had already made the right decision by leaving rates unchanged, as the August inflation figure did not influence their forecasting and modelling last week.

Els noted that the MPC had completed its analysis and might have decided correctly prior to the CPI release.