How Iran conflict has forced Sarb's hand on repo rate

Source: Pexels.

Being the second consecutive unchanged rate decision, this implies that further new growth stimulus for the economy is lacking.

If recent inflation data was the only measure for determining the next move in interest rates, the Bank may well have cut rates. February CPI (Consumer Price Index) inflation slowed to 3.0%, from January's rate of 3.5%, which is exactly on the Bank’s target of 3%. However, the February CPI survey seems like “ancient history” now , given what has transpired in the Middle East in recent weeks.

Strait disruptions loom

The US/Israeli - Iran conflict has since started up, leading to oil, fertilizer and certain petrochemical supplies being disrupted due to them having to be transported through the hotly contested Strait of Hormuz.

Just a month ago, the Brent Crude oil price was around $70/barrel. Currently, we are looking at the price hovering around the $100 per barrel mark, a sharp increase from having touched below $60/barrel early in January. The rand has also come under some pressure during the conflict, which adds to the looming hike in domestic fuel prices early in April.

Should the Gauteng petrol pump price rise by R5/litre (it appears set to be more than this), that would shift its year-on-year rate of change from deflation of -9,8% in February to a +12.5% increase in April. This is a very significant shift, and could take the Transport CPI back into positive territory, exerting additional upward pressure on overall CPI inflation.

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The Bank, being forward-looking in its decisions, was faced with these recent additional risks of a highly unpredictable nature, with much depending on how long the conflict in the Middle East continues. In addition, a significant portion of the world's fertilizer supply also needs to be shipped from the Gulf states through the Strait of Hormuz.

With South Africa importing much of its fertilizer, this raises questions around the potential for a food price inflation impact emanating from the Middle East conflict. And then there are certain petrochemical exports that also need to use the Strait.

Given all of this uncertainty, and the evidence that actual inflationary pressures are already “elevated”, the South African Reserve Bank (Sarb) probably took the best option under the circumstances, namely putting any interest-rate move on hold for the time being,and perhaps taking something of a “wait-and-see” approach.

Household spending growth slows

In the meantime, the impact of a second consecutive unchanged interest-rate decision could lead to growth slowdowns in certain credit-dependent spending areas of the household sector economy, most notably durable consumer goods (which includes motor vehicles), to a lesser degree semi-durable consumer goods, and home buying demand.

Real (inflation-adjusted) year-on-year growth in durable goods consumer spend reached a strong 8.8% in the final quarter of 2025, boosted by interest rate cuts last year.

Growth rates in these cyclical consumer goods segments typically surge on interest rate cutting, and slow quickly when interest rates bottom out and start to move sideways. This appears to be where we are currently getting to in the interest rate cycle, at least for the time being.

The value of new residential mortgage loans granted had accelerated to 18.2% by the third quarter of last year. This rate of growth may have accelerated further in the final quarter of 2025 (data not yet available), but is also expected to slow in the first half of 2026, on the back of a lack of fresh interest rate cutting.

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Can the economy still strengthen in 2026?

The Middle East conflict needs to de-escalate very soon for that to happen. This begs the question as to whether economic growth in 2026 can prove to be stronger than the 1.1% of 2025. I project a slightly better 1.3% growth rate for this year, on the assumption that the Middle East conflict is short-lived.

The reasoning is that the full impact of last year’s interest rate cutting still has to fully feed through to the entire economy, and could thus yet still provide a mild boost to the “co-incident to lagging” sectors of the economy.

This rests on the assumption that a solution is found for the Strait of Hormuz supply disruptions very soon, which allows the Reserve Bank to keep interest rates unchanged through the rest of the year, as a manageable near-term inflation uptick works its way through the system.

While it is not easy to predict the outcome of the conflict, and thus the extent of the inflation surge, the reality is that the cost of living in the US has been a major election issue in the recent past. With the majority party’s margin in Congress being very small, and midterm elections taking place later this year, there exists a very strong incentive for the ruling Republican Party to solve quickly for this key driver of the cost of living.

However, forecasting at such times as these is even more hazardous than usual, and the inflation risks linked to this particular conflict, given its location around the all-important shipping lane through the Strait of Hormuz, are huge.