OPINION: Acting early: why the SARB can’t afford to wait

Author: Adam Furlan, Portfolio Manager at Ninety One

South Africa’s inflation story has taken a turn. After months of steady decline, supported by a firmer rand and the disinflationary tailwind imported from global markets, consumer price inflation has risen to 4% year-on-year in April, up from 3.1% in March. Core inflation has nudged higher too, from 3.2% to 3.6%. The numbers are not alarming on their own, but they arrive at an awkward moment for the South African Reserve Bank, and in my view, they leave the SARB with a genuine conundrum.

The Reserve Bank only recently shifted its inflation target to 3%, a move reaffirmed by National Treasury in the final quarter of last year. Until recently, the trajectory was cooperating. Now, a supply shock, principally in energy, has flipped the script, and the risk of food inflation building later in the year is sharpening the question of how the central bank should respond.

The intuitive view is that supply shocks are exogenous events: they sit outside the SARB’s control, they fade, and raising rates will not change the price of petrol at the pump. Why act at all? That is not, in our view, how the Governor and his team are thinking about the problem.

You don’t wait to see second-round effects coming through from a supply-side shock. You act early, and acting early means that, in the long run, you have to hike less, and you have a smaller impact on the economy. That has been the consistent message from Lesetja Kganyago’s recent public appearances, and it is a discipline the SARB applied in 2022. With the benefit of hindsight, we believe that approach proved correct.

On that basis, our expectation is that the SARB will hike by 25 basis points at the May Monetary Policy Committee (MPC) meeting on Thursday, with the possibility of one or two further hikes in the cycle if the impact of the war broadens. The aim is not to wrestle a single inflation print into submission, but to anchor expectations before the supply shock seeps into wage settlements, pricing decisions, and the broader behavioural fabric of the economy.

That is where the real risk sits. Inflation at 4% is uncomfortable but not catastrophic; it remains below the midpoint of the old 3% to 6% target band (and within the new 2 – 4% tolerance), even if that band no longer defines the SARB’s mandate. The bigger concern, in our view, is what happens to inflation expectations. The May meeting will be held without the benefit of an updated expectations survey, but the next release will be closely scrutinised. If expectations drift upward, it would signal that second-round effects are taking hold, and that is the point at which the central bank’s tolerance narrows quickly.

Markets, for their part, have already moved. A 25-basis-point hike in May has been priced in for some time, and recent volatility has, if anything, added to that conviction. A sharp reversal in oil prices, perhaps triggered by an easing of geopolitical tensions and a reopening of the Strait of Hormuz, could change the calculation. South African rates can react quickly to good news as well as bad. But we are cautious about how much hiking the market is now pricing in.

Our base case is for average inflation of 4.5% in 2026, declining through 2027, with a peak above 5% in the fourth quarter of this year. Against that profile, more than a full percentage point of hikes would push real rates into restrictive territory, arguably further than the inflation outlook warrants if oil prices correct and the trajectory turns over as expected.

For portfolio positioning, the implications are practical. Our analysis flagged the upside inflation risks early, particularly on food, ahead of the energy supply shock. That early warning translated into a deliberate underweight to shorter-dated bonds in the Ninety One Diversified Income Fund, which are most sensitive to the kind of rate-hike repricing now playing out. Switching into inflation-linked bonds out of nominals also benefited the fund. 

The April CPI print was in line with our expectations and did not prompt a fresh shift, but our cautious stance on duration, especially at the front end of the curve, remains in place. The situation remains fluid, and much like the Reserve Bank, we remain data-dependent and stand ready to act on opportunities that arise in the market during this volatile period. 

The broader message, for us, is one familiar to anyone who has watched the SARB navigate previous cycles. Central banks earn their credibility in moments like this, when the temptation is to look through a shock and the discipline is to act before the damage compounds. That is precisely why we believe the front end of the curve still warrants caution, and why early action, however unwelcome in the short term, tends to be the lower-cost path over time.