Inflation Forecast and Interest Rate Decision

The South African Reserve Bank is set to make its first interest-rate decision of the year, and experts are weighing in on the potential outcomes. Goldman Sachs Group and Morgan Stanley believe that the bank may lower its inflation forecast for 2026 due to a stronger rand and weaker-than-expected oil prices.

Factors Affecting Inflation

The rand has strengthened significantly since the central bank’s November assumption of 17.25 per dollar for the first quarter. Additionally, oil prices are tracking well below the bank’s $67-a-barrel forecast for this year. According to Goldman’s Andrew Matheny and Ludovica Ambrosino, this implies a likely downward revision of 0.2-0.3 percentage points to the inflation outlook for 2026.

Expert Projections

Morgan Stanley and Nedbank Corporate and Investment Banking project an inflation rate of 3.2% for 2026, which is lower than the central bank’s forecast of 3.5%. This would bring inflation close to the monetary authority’s new 3% target. However, experts are divided on whether policymakers will cut interest rates, with 11 out of 21 economists surveyed by Bloomberg expecting a 25 basis-point cut to 6.5%, and the rest expecting a hold.

Reasons for a Rate Cut

Nedbank CIB’s Reezwana Sumad argues that the rand’s 3% gain against the dollar this year, falling oil prices, and inflation undershooting the central bank’s 2025 forecast by about a percentage point are all reasons to lower borrowing costs. On the other hand, Morgan Stanley’s Andrea Masia expects officials to adopt a cautious approach due to more rigid inflation expectations and foreign-exchange weakness anticipated in the second half of the year.

Central Bank’s Stance

The central bank’s own models show gradual interest-rate cuts in 2026 as price pressures subside. However, Matheny and Ambrosino believe that the bank would prefer to err on the side of caution and remain behind the curve in the cutting cycle, especially given the recent sharp rand appreciation and geopolitical risks that could pose upside to the oil price or downside to risk sentiment and the rand.

Conclusion

In conclusion, the South African Reserve Bank’s interest-rate decision will be closely watched, with experts divided on the potential outcomes. While some argue that a rate cut is justified due to a stronger rand and weaker oil prices, others believe that the bank will adopt a cautious approach. Ultimately, the decision will depend on the bank’s assessment of the economy and its priorities in managing inflation and growth.