SARB PRE-MPC Commentary
Renewed hostilities between the US and Iran are testing the June memorandum of understanding. While diplomatic channels remain open, the situation continues to be fluid and fragile.
The resurgence of tensions is once again disrupting commercial traffic and global supply chains and has reversed the early decline in international oil prices. Although oil prices have risen sharply, they remain below the peaks reached during the height of the conflict. However, a prolonged conflict will eventually weigh on inventories, which have so far provided a buffer against supply disruptions.
Global growth has remained resilient, supported largely by strong demand for artificial intelligence and its continued adoption. However, this resilience will be tested this year not only by higher energy prices but also by elevated trade tariffs. The Trump administration's proposed shift from temporary Section 122 tariffs to permanent Section 301 measures could see many economies facing duties of 10% to 12.5%, while selected countries could be subject to tariffs of up to 25%.
In South Africa, continued progress on economic reforms and favourable terms of trade are expected to partly offset the drag from higher energy prices and US tariffs. Nevertheless, economic growth is likely to remain moderate. We expect central banks around the world to remain vigilant against second-round inflationary effects stemming from higher energy prices.
The US Federal Reserve is likely to maintain a hawkish stance and could raise interest rates further, as inflation has remained above its 2% target since 2021. The new Fed Chair's commitment to restoring price stability reinforces this bias.
The SARB will likely raise interest rates again as inflation moves above target and geopolitical developments increase upside risks to the inflation outlook. While the Monetary Policy Committee is expected to remain divided, we anticipate a measured and moderate hiking cycle.
Overall, renewed conflict between the US and Iran has added another layer of uncertainty to an already fragile global economic outlook.
