South Africa’s central bank said it will redraw its economic risk scenarios ahead of its next interest-rate decision after rising oil prices linked to conflict in the Middle East complicated the country’s inflation outlook.
Governor Lesetja Kganyago said the South African Reserve Bank would revise its projections before its March 26 policy meeting as global markets react to escalating tensions involving Iran.
The conflict triggered by military strikes involving Israel and the United States has pushed global crude prices sharply higher, adding fresh uncertainty to inflation forecasts in emerging markets including South Africa.
“We had our baseline and we had an optimistic scenario and an adverse scenario,” Kganyago told Reuters in London, referring to projections prepared for the bank’s previous policy meeting in January.
But he said the earlier downside scenario had already been overtaken by events.
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“The adverse scenario assumed oil would average around US$75 per barrel and the rand would weaken to 18.50 to the dollar,” he said. “Now that scenario is gone it is in the past. We will come up with a completely new one.”
The central bank kept its benchmark interest rate unchanged at 6.75 percent at its last meeting in January, in a split decision by policymakers who opted to wait for clearer evidence that inflation expectations were continuing to decline.
Since then, energy markets have been jolted by the widening Middle East conflict. Global benchmark Brent crude climbed above $94 per barrel this week, raising concerns about higher fuel and transport costs feeding into consumer prices worldwide.
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At the same time, South Africa’s currency the South African rand has come under pressure, weakening to around 16.82 to the dollar as investors sought safer assets amid geopolitical uncertainty.
Kganyago said currency movements often have a greater impact on domestic inflation than oil price swings.
“In South Africa, a 10 percent move in the exchange rate has a much stronger effect on inflation than a similar move in oil prices,” he said.
However, he cautioned that policymakers must determine whether market movements are temporary or likely to persist before responding with interest-rate changes.
“The call that as a policymaker you must make is: is this transitory or persistent?” he said. “You respond to the persistent, not the transitory and that is not an easy call.”
The governor said geopolitical tensions and their financial market repercussions would dominate discussions at the bank’s upcoming meeting.
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“We will discuss what is the impact of this geopolitics on the markets, on oil, on emerging markets and on exchange rates,” he said.
Higher energy prices could complicate the central bank’s efforts to keep inflation within its target range of 3 to 6 percent, particularly in an economy that imports most of its fuel needs.
South Africa’s policymakers have spent the past two years battling price pressures driven by global shocks, currency volatility and domestic energy challenges.
In addition to setting interest rates, the central bank has been active in foreign-exchange markets to strengthen its reserve position.
Kganyago said the bank would continue buying dollars when market conditions were favourable, even as the rand weakened.
“If we think that there are cheap dollars available in the market, we will pick them up,” he said.
He added that South Africa’s reserves had also been supported by rising gold prices and government borrowing.
Central bank data released on Friday showed that the country’s net foreign reserves rose to US$75.84 billion at the end of February, up from $74.88 billion in January.
Gold — one of South Africa’s key reserve assets — has rallied amid global uncertainty as investors seek safe-haven investments during periods of geopolitical tension.
Despite the latest market volatility, Kganyago said policymakers would continue to assess incoming data carefully before deciding whether any policy adjustment was necessary.
“We need to look at the full set of risks,” he said, noting that global tensions, currency movements and energy prices were all feeding into the bank’s updated outlook ahead of its next decision.
