South Africa's surge in inflation reinforces expectations of an interest rate hike.

Written by Ziad Abdel Fattah:

Inflation data released in South Africa has reinforced expectations that the Reserve Bank of South Africa will raise interest rates for the second time in a row at its upcoming meeting, after recording Consumer prices June saw the highest annual inflation rate in two years.

Data released Wednesday by Statistics South Africa showed that the annual inflation rate rose to 5% in June, compared to 4.5% in May, exceeding analysts' expectations of 4.7%.

Transportation is driving rising inflation.

The transport sector was at the forefront of the factors driving up inflation, with fuel prices rising sharply as a result of geopolitical tensions related to the Iranian war, which was reflected in transport costs and consumer prices.

Core inflation, which excludes food and energy prices, also rose to 4.1% year-on-year, exceeding economists' expectations of 3.9%, indicating continued inflationary pressures within the South African economy.

Indicators suggest that the South African Reserve Bank is likely to raise interest rates by 25 basis points at its meeting scheduled for Thursday, as part of its efforts to bring inflation back to the target level of 3%.

Most analysts surveyed by Reuters had already predicted an interest rate hike even before the inflation data was released, but the new figures reinforced that scenario.

According to Reuters, conditions are now ripe for a decision to raise interest rates by 25 basis points, given the continued pressure on prices and rising inflation expectations.

Since the last monetary policy meeting in May, consumer inflation expectations have risen markedly, an indicator closely watched by the central bank when determining its monetary policy direction.

Last May, the South African Reserve Bank raised its inflation forecasts to 4.4% for 2026 and 3.7% for 2027, compared to its previous forecasts of 3.7% and 3.3% respectively.

Razia Khan, chief economist at Standard Chartered Bank, said that the unexpected rise in the inflation rate during June, along with the deterioration in household inflation expectations, reinforces the need for a tightening of monetary policy during the July meeting, supporting expectations of an interest rate hike.