SARB’s balancing act goes beyond the latest inflation number

By Francois du Plessis, CEO of CFI Financial Group South Africa

On 23 September, Stats SA reported annual consumer inflation at 4.4% in August, up slightly from 4.3% in July. The same day, the Monetary Policy Committee (MPC) lifted the policy rate by 25 basis points to 7.25%. It would be easy to read that as a straightforward response to higher inflation. I think the decision says more about the risks SARB sees beyond the headline number and how persistent some of those pressures could become.

The number is only part of the picture

The 4.4% headline number hides some very different pressures underneath it. Fuel pressures have started building again, while services inflation increased to 5.1% in August. Food inflation, meanwhile, is at its lowest level since 2010, and the rand has helped contain import prices.

The source of the inflation pressure is just as important as the headline number. Fuel can push inflation higher quite quickly and can also reverse if energy prices ease. Services inflation is usually more persistent, especially once higher prices start feeding into what businesses and households expect.

SARB has made it clear that services remain an area of concern. The Bank also sees upside risks to inflation and now expects inflation to return to around its 3% target only towards the end of 2027.

For me, that is why the composition of inflation deserves as much attention as the headline number.

Expectations are part of the policy story

The latest survey cited by SARB shows longer-term inflation expectations at around 4%, compared with the Bank’s 3% target. That leaves expectations near the top of the 2% to 4% tolerance band. They had eased slightly, although the survey was completed before the latest fuel-price increases.

This is where a temporary price shock can become more difficult for a central bank. If people begin to assume that higher inflation will persist, that thinking can influence price and wage decisions and make it harder to bring inflation back down.

A slower economy complicates the picture

SARB has lowered its forecast for South African growth in 2026 to 1.2% from 1.4%. The economy contracted in the second quarter, although the Bank expects activity to recover during the second half of the year.

Price stability remains SARB’s mandate. The state of the economy still affects how restrictive a given interest rate feels across households and businesses.

If inflation changes while the policy rate stays the same, the degree of monetary restriction changes with it. That is one reason a headline policy rate cannot be read in isolation from the inflation path.

The global backdrop has become tougher

SARB is also making these decisions in a more difficult international environment. The US Federal Reserve raised its target range by 25 basis points in September. SARB has also pointed to higher global interest rates and renewed pressure from disruptions to energy supplies. These conditions can affect the rand and domestic fuel costs while changing the return global investors require for holding emerging-market risk.

That makes the domestic policy trade-off harder when inflation pressure is already building. The shift inside the MPC is worth noting too. In July, two members favoured a 25-basis-point increase while four preferred to hold. In September, the increase was unanimous.

The unanimous vote should not be read as a signal that another rate increase is automatic. SARB’s own model has the policy rate broadly stable through the rest of the year. What has changed since July is that concern about the inflation outlook appears to be more widely shared across the committee.

That is the balancing act I take from September. SARB is trying to stop renewed inflation pressure from becoming embedded while monetary conditions are already restrictive and economic growth remains subdued.

The next few inflation releases will tell us more about whether the fuel shock begins to fade and whether services inflation starts to cool. Inflation expectations will be equally important. If fuel and services pressures begin to ease, the policy picture could look quite different over the coming months. Persistent pressure would leave SARB with a harder job, and the September decision shows that it is prepared to respond when it believes those risks are becoming more entrenched.

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