Morgan Stanley says South Africa to stay on prolonged rate hold

Surging oil prices triggered by the Middle East conflict are likely to push South African inflation higher and see policymakers keep interest rates unchanged for months, according to Morgan Stanley.

“The implication is a materially longer hold rather than an immediate tightening response,” Morgan Stanley economist Andrea Masia wrote in a research note. He sees the central bank staying on hold through most of 2026 and resuming its easing cycle in November, “followed by two 25 basis point cuts in 2027, taking the terminal repo rate to 6%.”

Lesetja Kganyago, governor of South Africa’s Reserve Bank.

The central bank’s monetary policy committee is widely expected to hold rates at 6.75% next week as officials assess the fallout from the Iran war, which has lifted oil prices by roughly 45% since it began on February 28.

Based on an outlook that oil prices will remain between $90 and $100 per barrel for several months, Morgan Stanley sees South African inflation accelerating temporarily and growth taking a hit this year.

Under that projection, inflation in Africa’s most industrialised economy is forecast to rise from 3.5% to a peak of about 4.3% in April, before easing toward 3.4% by the end of 2026. The South African Reserve Bank targets 3% inflation, with a one percentage point tolerance band on either side.

“The MPC would prefer to look through this situation for as long as markets will allow, focusing instead on the still-downward path of inflation expectations and an inflation forecast that still hits the target within the forecast horizon,” Masia wrote.

For South Africa, higher oil prices raise fuel costs directly while also weakening the rand, amplifying imported inflation. The analysts estimate a 10% increase in oil prices can lift inflation by about 40 basis points once broader price spillovers are taken into account.

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A bigger risk would emerge if oil prices rise further or inflation expectations begin to accelerate, a scenario that could prompt the central bank to consider rate hikes later this year.

The earliest point at which such pressures might become visible would be around September, when new inflation expectations data becomes available ahead of a Sarb meeting, according to the note.

Morgan Stanley cut its 2026 growth forecast to 1.7% from 2%, citing weaker consumer spending, tighter financial conditions, and currency volatility.

The rand’s sensitivity to global risk sentiment could amplify the impact. The analysts calculated that the currency tends to react more strongly to swings in market volatility than to oil prices themselves, making it a key transmission channel for global shocks into the domestic economy.

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