SARB rate hike next week now more likely after Fed move, but holdout case remains

South Africa's central bank faces a pivotal decision on September 23, with the odds of a rate increase shifting sharply upward after the US Federal Reserve raised its own rates by a quarter point this week. The move has scrambled the calculus for the South African Reserve Bank's monetary policy committee, which has been under sustained pressure to tighten credit conditions as inflation pressures persist and the rand weakens.

Before the Fed's announcement, economists were genuinely divided on whether the SARB would move. Now the picture has clarified somewhat. Investec's chief economist Annabel Bishop, who previously assessed the chances of a hike as roughly even, now puts the probability above 50%. The market has already made its judgment: forward-rate agreements—financial contracts that lock in future borrowing costs—are pricing in a rate increase next week with better than 85% confidence. Some traders see it as nearly certain.

The mechanics are straightforward and brutal. When the Fed raises rates, US dollar assets become more attractive to global investors. Money flows out of emerging markets like South Africa, seeking higher returns in America. The rand weakened immediately after Wednesday's announcement, moving from 16.26 to 16.40 against the dollar. A weaker currency makes imported goods more expensive, and since South Africa imports most of its fuel, that feeds directly into inflation. The SARB faces a choice between letting the currency slide further—which worsens price pressures—or raising rates to make local assets more attractive again.

Bishop expects the SARB to match the Fed's move, raising its policy rate by 25 basis points to 7.25%, which would push the prime lending rate to 10.75%. This would be only the second increase this year, following a hike in May. Frank Blackmore, KPMG's lead economist, goes further, expecting rate increases both next week and again in late November. The context matters: after six consecutive rate cuts in 2024 and 2025, the policy rate remains a full percentage point below its 2023 peak of 8.25%. There is room to move without returning to the highest levels of the recent past.

But the case for holding remains live, and it comes from a serious place. Johann Els at PSG Financial Services argues that the SARB was an early mover, raising rates in May well before other central banks began tightening. That early action, he contends, has already done much of the work. More importantly, inflation expectations have cooled. The Bureau of Economic Research at Stellenbosch University released its third-quarter survey this week, and the numbers surprised to the downside. Even households—whose inflation expectations typically run far higher than those of businesses or economists—revised down their one-year outlook from 6% to 4.9%, the lowest in about five years. Over five years, expectations either fell or held steady.

Yet the survey carries a significant caveat. It was conducted from mid-August through early September, before oil prices spiked sharply in response to renewed Middle East tensions. Bishop notes the survey does not capture that escalation, which has already begun feeding through to energy markets. More troubling still, wage expectations rose to 5% in the survey—a sign that workers and employers expect higher pay settlements ahead. That matters because wage growth that outpaces productivity can become self-reinforcing inflation, what economists call second-round effects. The SARB is likely to worry about that signal.

The timing adds another layer of complexity. The interest rate decision has been moved to Wednesday, September 23, because the following day is Heritage Day, a public holiday. Governor Lesetja Kganyago recently explained that MPC members present their cases and cast their votes on the first day of the two-day meeting cycle, which means the decision could be locked in on Tuesday—before Statistics SA releases August inflation data on Wednesday morning. The July print came in at 4.3%, down from a June peak of 5%, but the SARB still expects inflation to stay above 4% for the rest of the year. Consumers, meanwhile, face another jolt: fuel prices are set to spike again in October, with current underrecoveries of 2.62 rand per litre for 95-octane petrol and 2.81 rand per litre for diesel.

What hangs in the balance is not just the technical question of whether rates go up or stay flat. Nicolas Dahan of Amundi, Europe's largest fund manager, warned that another hold could seriously damage the SARB's credibility. The market was nearly unanimous in expecting a hike in July, and the committee's decision to pause surprised almost everyone. A second consecutive hold could trigger a loss of confidence that weakens the rand further and pushes up government bond yields—making it more expensive for the state to borrow. The SARB knows this. Whether that pressure, combined with the Fed's move and the weakening currency, proves decisive will become clear in six days.