Central bank revises scenarios ahead of March 26 decision
South Africa’s central bank will rewrite the risk scenarios it uses to guide policy deliberations ahead of its next interest rate decision on March 26, Governor Lesetja Kganyago told Reuters, as the expanding conflict in the Middle East pushes energy prices higher and adds uncertainty to inflation forecasts.
The South African Reserve Bank held its benchmark rate at 6.75% in a split decision in late January, saying at the time that officials wanted more evidence that inflation expectations were easing. The framework presented at that meeting included a baseline outlook, an optimistic path and an adverse case designed to test how the economy could respond to unfavorable shocks.
Kganyago said the adverse scenario used in January is no longer relevant. He said it assumed an average oil price of $75 per barrel for the year and a weakening in the rand to 18.50 per U.S. dollar. “Now the previous adverse scenario is gone,” he said, adding that policymakers will develop “a completely new one” for the next meeting.
Oil surge overtakes earlier assumptions while rand weakens less
The recalibration reflects how quickly market conditions have moved. The Middle East crisis, triggered by Israeli and U.S. strikes on Iran, has lifted Brent crude futures to more than $94 per barrel this week, exceeding the oil level embedded in the January downside case.
Currency moves have been less extreme than the earlier stress assumption. The rand weakened to around 16.82 to the dollar, Kganyago said, well short of the 18.50 level built into the previous adverse scenario.
That mix of higher oil and a comparatively steadier currency complicates the inflation picture. South Africa is sensitive to imported price pressures, but the channels differ. Oil influences domestic fuel costs and transport-linked inflation, while the exchange rate affects a broader range of imported goods and inputs.
Currency pass-through remains the key inflation risk
Kganyago said the exchange rate typically matters more for South African inflation dynamics than oil in percentage terms. He noted that a 10% move in the rand has a much stronger impact on inflation than a similar percentage increase in oil prices.
He described the current environment as adverse but not unfolding in the most damaging way policymakers had modeled earlier. “Yes, it’s the adverse scenario, but it is not playing out as we had feared,” he said, adding that officials would become more concerned once they see evidence of exchange-rate pass-through into consumer prices.
The central bank’s challenge is deciding whether the new shock proves temporary or becomes persistent enough to require a policy response. Kganyago said that judgment is difficult in real time, and that policymakers should respond to lasting inflation impulses rather than short-lived moves.
Rate outlook hinges on persistence versus transitory shocks
The comments underscore a cautious stance going into the March meeting. With the policy rate unchanged since January, the next decision will depend on whether inflation expectations continue to soften and whether the latest external pressures, including higher energy costs and currency volatility, translate into broader and sustained price gains.
Kganyago said the core policy call is determining what portion of the shock is transitory and what portion is durable. “You only respond to the persistent, not to the transitory,” he said, while acknowledging that distinguishing between the two is not straightforward, especially during a period of fast-moving geopolitical developments.
