South Africa: Reasons for Believing the Central Bank’s Outlook is Difficult

■ The decision at the July monetary policy meeting will likely depend on the June Consumer Price Index (CPI) to be released on the 22nd, and whether to choose between continuing interest rate hikes or maintaining the current rate.  
■ The central bank is expected to maintain its propensity to raise interest rates; future developments in oil prices and the El Niño phenomenon will need to be monitored. 
 
The South African Reserve Bank (SARB) will announce the results of its monetary policy meeting on the 23rd. At its previous meeting in May, the central bank decided to raise interest rates again after approximately three years. Whether to continue raising rates or maintain the current policy rate at this meeting is currently a matter of debate in the financial markets. When the rate hike was decided in May, only four of the six members of the Monetary Policy Committee supported it. The June Consumer Price Index (CPI) will be released the day before this meeting, on the 22nd. The market expects the overall CPI to rise by 4.7% year-on-year, still above the upper limit of the SARB's inflation target range (4%). If price trends meet expectations, market expectations for continued interest rate hikes may further intensify. 
 
However, regardless of the final decision at this meeting, the SARB is expected to maintain a policy stance favoring interest rate hikes in the short term. The main reasons for this are the sustained strength of crude oil prices and the occurrence of El Niño. Since March, rising international crude oil prices have heightened inflationary pressures and have been a key reason for the central bank's decision to raise interest rates in May. WTI crude oil futures prices fell to around $67 per barrel in mid-June, but have recently rebounded to around $83, with market expectations for further price declines significantly weakening. 
 
Regarding this El Niño phenomenon, the Japan Meteorological Agency predicts a 100% probability that it will continue into this autumn and believes it may even become one of the largest on record during the winter. The last El Niño event that came close to a historical large-scale event occurred between 2014 and 2016. During this period, South Africa's overall CPI year-on-year increase peaked at 6.8% in June 2014, then slowed down before rising again to 7.1% in February 2016. Meanwhile, from the end of 2013 to the end of 2016, WTI crude oil prices fell by a cumulative 45.4%, a stark contrast to current oil price trends; while the US dollar appreciated by approximately 31% against the rand, indicating a significant depreciation of the rand. Typically, El Niño events tend to trigger droughts, pushing up food prices, and the rand's continued depreciation at that time further fueled inflation in South Africa. According to 2024 (provisional) trade statistics, imports of "mineral fuels," including crude oil, account for about 20% (19.3%) of South Africa's total imports; thus, South Africa is generally considered a net importer of crude oil. This means that rising crude oil prices could lead to a deterioration in terms of trade, further depreciating the rand. 
 
In May, the SARB issued its most pessimistic scenario forecast, predicting inflation exceeding 6% and potentially requiring three more interest rate hikes. However, currently, the likelihood of this scenario remains low. The relatively strong rand against the US dollar this year is a positive factor. However, if crude oil prices continue to rise or El Niño intensifies further, the probability of this worst-case scenario will increase. Therefore, it can be said that SARB's future monetary policy operations will still face many challenges.