ECONOMIC OUTLOOK: Iran War drives June CPI to 5.0% — rate hike likely this week

South African consumer inflation accelerated sharply to 5.0% year on year in June from 4.5% in May, and is not seen as peaking yet in the wake of the oil price and other pressures unleashed by the Iran War.The data, released by Stats SA on Wednesday, comes the day before the Reserve Bank’s next interest rate decision. Economists and the economic spoor point to a rate hike, though this is not set in stone. (Image: Stats SA) The consumer price index (CPI) has now accelerated well beyond the Sarb’s 3.0% target and its “tolerance band” of 2.0% to 4.0% in the event of shocks.“This was largely reflective of the direct impact of the Iran War, with fuel prices rising significantly. This is a dilemma for the Reserve Bank, given that inflation is well above its inflation target and given that inflation is likely to continue exceeding its … target in the coming months,” said Dr Elna Moolman, Standard Bank Group Head of South Africa Macroeconomic Research.“We therefore expect the (Sarb’s) Monetary Policy Committee (MPC) to be quite divided at this week’s meeting. It may very well decide to hike further. But this should be the peak in their hiking cycle and we still think that as soon as the war is over and the oil price is sustainably lower, they should start unwinding these rate hikes and cut rates even further.” Moolman’s comments underscore the point that South African inflation is currently dancing largely to the tune of the Iran War.Analysts predict 25-50 basis point hikeWhile there is a chance the MPC could hold, most analysts predict a 25-basis-point hike on Thursday, and possibly 50 basis points.“This is the highest inflation outturn since June 2024 and reinforces our view that the South African Reserve Bank will raise interest rates by 25 basis points this week; a larger 50 basis point increase cannot be ruled out,” said Jee-A van der Linde, senior economist at Oxford Economics Africa.The Sarb’s policy rate is currently 7.0% and the prime lending rate is 10.5%. A further hike will be an additional burden on hard-pressed consumers and the slow-growth economy. Much of the blame for this lies with US President Donald Trump and his ill-conceived war on Iran. The focus of the MPC is on the trajectory of inflation and how its current decisions will nudge the curve back to its 3.0% target, and it has a lot to chew on amid the fog of uncertainty around the Iran War and its ongoing impact on the oil price.Fuel price cuts in July brought some relief and will be reflected in the July inflation data, and a further decrease may be in the offing in August. But petrol prices are R5.80 more per litre than they were when the hikes began in April in the face of the Iran conflict and the closure of the Strait of Hormuz, while the diesel price is R6.89 per litre dearer.Food inflation remained benign at 1.4%, but concerns are mounting about the impact of the current El Niño phenomenon, even with abundant supplies from this year’s stout harvest. The ripple effects from that will be felt only in 2027, and this is also on the Sarb’s radar screen in its long-term view.The bottom line is that the 3.0% target is unlikely to be reached any time soon and interest rates will remain elevated for the foreseeable future. DM