Hello and welcome to the special CNBC Africa broadcast. My name is Zinati Guma and of course it is D-Day for the South African Reserve Bank today. It's a second meeting for the year. Also, this meeting is especially important with global factors and local factors influencing central bank decisions. Of course, globally, we do have the heightened risk from the Middle East war that has pushed up oil prices to peaks of around $119, $120 a barrel. We also have global factors which in contrast have actually been good. In South Africa, we've had improving economic prospects. Good revenues are coming from the record prices that we have seen from the precious metals, gold, and PGMs. But also we have seen structural reforms progress accelerating on that front within Operation Vulindlela. But also the fiscal situation is looking good. Of course we had quite a big moment in 2025 when we had an upgrade from the ratings agencies and of course more are expected this year. So quite contrasting influences there with the global macro environment presenting heightened risks but local factors actually kind of bringing in a cushion there for the South African economy. All right, expectations for the SARB are for it to hold rates of course with that increased risk from inflation from oil on the inflation front. We do have the governor on the podium right now.
Equity, bond and currency markets with only a few safe havens and energy producers showing gains. This pricing has been largely orderly with few signs of financial market dysfunction. So far, we are just a few weeks into this shock and conditions remain extremely uncertain. At this stage, it is obvious that global inflation will be higher in the near term while growth will probably suffer from supply chain disruptions and rising costs. But the longer-term outlook is less clear. In these circumstances, leading central banks have generally kept rates unchanged as they wait for more information. Markets have largely dropped expectations for rate cuts in major economies and probabilities of rate hikes have risen. Turning to South Africa, the latest data show the economy grew faster in the fourth quarter of 2025 with output rising by 1.1% for the year as a whole. This is better than recent years, but still well below longer-run averages. We have been encouraged by green shoots such as rising confidence and stronger investments, but the ongoing war would interrupt the growth recovery. For the time being, our growth projections are largely unchanged. There have been data revisions which lowered 2025 growth, making 2026 still a bit stronger in comparison. This offsets some of the impact from the current shock. We still have growth rising to around 2% over the next few years, but we now see downside risks to the outlook. Moving to prices, inflation was 3% for February with core inflation also at 3%. This is precisely in line with our target. Higher energy prices will raise inflation in the near term. We expect headline will soon accelerate to around 4% with fuel inflation over 18% for the second quarter. Our baseline forecast then has a gradual unwinding of the shock taking inflation back to 3% late next year. The ongoing Middle East conflict is a clear instance of a supply shock which raises prices while weakening demand. The standard response to a supply shock is to look through first-round effects which are unavoidable and cannot be stopped by interest rate changes. At the same time, central banks should be alert to second-round effects where an initial shock triggers broad price increases. Getting policy right means ensuring that the price response to supply shocks is transitory and not persistent. It is always difficult to assess second-round effects in time. Waiting for clear evidence risks leaving the policy response too late. We therefore rely on forecasts as well as indicators like wages and inflation expectations to judge if there is a broader buildup of inflationary pressures. For expectations, the latest test survey once again showed all respondents lowering their projections closer to our target. But this survey was in the field before the war started. Market-based indicators of inflation expectations have picked up recently, but they tend to be volatile. The fact is we are still only a few weeks into the crisis. The coming months will be crucial for assessing the longer-term inflation consequences. Given current forecasts, we see inflation risks to the upside. Against this backdrop, the MPC decided to keep the policy rate unchanged at 6.75%. The decision was unanimous. In previous meetings, we warned of elevated risks and we have been proceeding cautiously in our rate setting. Now a crisis has hit. This prudent approach is proving appropriate. The latest forecasts from our quarterly projection model show rates unchanged for a longer period, postponing the cuts from the January projections. The policy stance is treated as moderately restrictive which helps bring inflation back to target. As before, this rate path remains a broad policy guide. Our decisions will continue to be taken on a meeting-by-meeting basis with careful attention to the outlook, data outcomes and the balance of risks to the forecast. Given global uncertainty, it is useful to consider scenarios. For this meeting, we looked at two alternatives, both with more adverse assumptions than our baseline. The first scenario assumes that the conflict lasts another two months or so with oil prices averaging nearly $100 per barrel for this period and the rand about 5% weaker against the dollar. The second more extreme scenario has the war lasting over a year with oil prices staying above $100 per barrel and the rand 10% weaker. In both scenarios, inflation is higher, exceeding 4% in the first version and 5% in the second. Both call for higher interest rates this year, with one hike in the first scenario and several more in the other. Inflation then slows as oil prices start easing and the policy response takes effect. In the first scenario, we are back to target during 2027. In the second scenario, this only happens in 2028. In both cases, growth is weaker initially, but there is some catch-up later. When we adopted the new 3% inflation target, we were clear that achieving it could take a couple of years. Until recently, conditions were favorable and it looked like we would get there fast. Now, there has been a negative shock and it could take a bit longer. Nonetheless, all our forecasts show inflation reverting to 3% during the next two years. We are committed to delivering that outcome and we stand ready to act as needed to fulfill our mandate. To conclude, South Africa has made important macroeconomic progress recently with a lower inflation target, improved fiscal prospects and steadier growth. Prudent monetary policy will help sustain these gains despite difficult global conditions. Furthermore, support would come from reaching a prudent public debt level, lowering administered price inflation, and continuing structural reforms that raise potential growth. At this stage, we would like to pause and take questions from members of the media. As usual, please identify yourself and the media house that you represent and we would then deal with your questions. Any takers? Everything clear and uncertain.
Thank you. Good afternoon Governor and the rest of the MPC. My name is Dan Doana from Bloomberg News. I've got a couple of questions and the first one is that Governor, you've previously said that South Africa doesn't have sufficient buffers to act against economic shocks and given the scale of the one that we are seeing unfold at the moment, just how much policy tools do you have to deal with the shock and what would those be and at what points do you step in to cushion the rand if the volatility that we're seeing persists much longer. And then the last one, I'm just wondering what indicators will determine whether the current bout of inflationary pressures is going to be transitory or whether they're going to be much longer-lasting. Thanks very much.
Thank you very much. Yes, we had talked about buffers and South Africa building buffers. We have been on a journey of building the buffers. One of the buffers that we obviously had then had to build with a new inflation target was to make sure that we are as close to the target as possible. That meant that when a shock comes and we get diverted from our target, we have got the cushion and we would be able to calibrate policy appropriately to come back to the target. Secondly, a couple of years ago, we had talked about the level of reserves and our the level of our reserves was deemed inadequate by some measures. Today when you look at our reserves and you use any reserve adequacy measure you will find that South Africa's external foreign exchange reserves are adequate. That was a buffer that was made. Third, we had been repeatedly warning about the importance of prudent macroeconomic policy that stabilizes the debt level and goes for a debt level that is prudent as a form of a buffer. According to the Treasury, this fiscal year, coming fiscal year, we would have run three consecutive years of primary surpluses. And as the Minister of Finance stated in February, that would mean that at the end of this fiscal year, debt peaks and it starts declining going forward. That means that it had given us a cushion as a country. So that is what one would watch as the buffers that had set us in good state. And you then ask what would be done to cushion against the rand. The rand is a very flexible currency. It is understood as a currency that plays its role as a shock absorber for the South African economy. When things are good and money is flowing into the country, the currency appreciates and as the currency appreciates, it thus equilibrates the other variables in the economy. When we have capital outflows, the currency depreciates and with that depreciation, it makes it expensive for those who would like to exit in a panic when they do that. So once the questions are done, but the same rand, also South Africa enters this space not just with those buffers that I had talked about, we entered into this shock where we are having a net positive net international investment position and based on what we had seen in the past when things go the way in which they do, money gets repatriated back into South Africa because lots of the South African investors who had an offshore exposure see an opportunity to take advantage of the movements to come into this. So the rand plays its role. We are having a floating exchange rate. And when you have a floating exchange rate, you must allow the floating exchange rate to play its role and absorb the shocks on your behalf. Then you ask what indicators would we use to determine whether the shock is transitory or whether it is persistent. It is more an art than it is a science. It involves significant judgments. What you can't do when you are faced with a shock is to sit and wait until inflation has risen and then only respond at that time. As soon as the assessment is that inflation expectations are going to rise, as soon as you establish that the rise in prices and of inflation is beginning to be broad-based, and many people will always say that, oh no, it's just an oil price shock on exchange rate, we can take out energy and food prices out of the basket. We will be left with a measure called core inflation. When you see core inflation starting to rise, then you worry that inflation expectations are going to be rising and that the inflationary pressures are beginning to be broad-based. Two years ago in our monetary policy review we did publish a number of other measures that you all have to look at. One is published by Statistics South Africa which is the trimmed mean of inflation which takes out the fast-rising items and the slow-moving items out and work out an average that gives you the trimmed mean. And the other is to remove additional items from core inflation what we would call super core. And then the other measure is to look at the principal component of inflation, the PCCI. And so we have got to look at all of those but even that you must understand those measures are backward-looking and you have got to set policy on the basis of the outlook and your view of how that outlook evolves. And so that is where judgment comes in and that is why you have an MPC. There must be deliberation about how we see those indicators evolve, what it means for growth, what it means for inflation and then calibrate policy appropriately.
Governor, Alistister Bull from Bloomberg. Thanks very much for taking our questions. I'd like to come back to something in your opening remarks that I don't want to paraphrase, but the impression I got from reading it is that you feel that you currently have policy in a sufficiently restrictive posture that provided the Iran war and the oil price shock is resolved relatively soon, you don't actually have to raise rates again. But if it would go on for another sort of six to eight weeks with the rand and the oil price roughly where they are, your model shows a quarter point and if it was prolonged beyond that, there would be additional tightening. Is that a fair characterization of the MPC stance today? Given everything that's so uncertain, you're on hold for now unless things start getting worse or it's prolonged.
Alistister, there are so many moving parts at the moment and there are so many signals that impact on all the variables that just now there might be a social posting that would affect the direction of oil prices and when that comes you look at that and important thing for us as a central bank is to distinguish between the impulse of these variables and the noise that comes from these variables. We did indicate that monetary policy is still moderately restrictive, not sufficiently, said moderately restrictive and part of it is that we are in a different space from January. In January, we were forecasting lower inflation and with lower inflation, it meant that the level of restrictiveness was higher. But as inflation is to rise in our baseline and in the scenarios, it reduces the level of restrictiveness. I'll give you an indication. If we are to use the neutral real interest rate which is the rate at which monetary policy is neither restrictive nor expansionary, you will realize that if you take today's real repo rate, that the gap between the real repo rate today compared to the neutral interest rate, real interest rate has narrowed significantly. Actually it is just about 30 basis points. So the level of restrictiveness has significantly moderated. But getting into this meeting with all the information and data that we have at the moment and our assessment of the outlook and the risks attendant to it, we deemed it appropriate at this meeting to keep rates the same. It is interesting that at the previous meeting all of you felt so confident and you felt that couldn't we be reducing the level of restrictiveness. Okay, only two people interested today. Oh, Sarah.
Yes, we have a question from Somang from Seapur. He asks, 'How much longer beyond the initially signaled two years does the MPC now expect inflation to be anchored at the 3% target?'
Good afternoon, Governor. Enzilla from Bloomberg. Do you think that you don't you think that you've been a bit too cautious in holding steady at the headline rate? You know, with what happened in Ukraine, everyone thought it would have been a few weeks or a few months and four years later it's still ongoing. Do you not think it could have been that you've been a bit too conservative in that regard? Thank you.
I actually think the question you wanted to ask is the other way around. Because you see, if we were conservative what we should have done in this meeting is to hike and the fact that we decided to hold is consistent with what we had said in the previous meeting. There are risks but we believe the posture that we are taking is prudent. So there aren't conservatives in the central bank. We have got very prudent human beings. So the posture that we take was a prudent one and there are so many moving parts and we will keep on assessing this thing meeting by meeting and there's a major central bank which pronounced on policy last week and this week its governor had to be speaking because things changed so much since their meeting last week. It is not unlikely that we will get out of here and tomorrow things has changed so much and you say how come you guys didn't anticipate that things will change this much. Well that is why we characterize this environment as an uncertain environment. Alex.
