Analysts expect the South African Reserve Bank’s Monetary Policy Committee (MPC) to increase interest rates by a quarter of a percent when it announces its decision on Wednesday amid inflationary pressures and uncertainty due to the ongoing US-Iran war.

The expected hike is also supported by elevated levels of inflation which currently sits at 4,3%, a figure above the bank’s 3% target rate.

The policy rate is currently at 7% while the prime lending rate is recorded at 10,5%.

Expectations around a possible 25-basis point interest rate hike by the reserve bank come amid elevated brent crude oil prices which reached highs of over $120 per barrel earlier this month as the conflict in the Middle East intensified.

Head of Macroeconomics, Fixed Income and Currency Research at Standard Bank, Elna Moolman says South African felt the impact in the form of higher fuel inflation.

“The Reserve Bank may very well hike interest rates by another quarter percentage point this week. We have, of course, seen a significant increase in domestic fuel prices. But so far, we haven’t really seen much second round effects, in other words, a spillover into non-fuel prices.”

“But the longer fuel costs remain high and the higher they go, the more concerned the reserve bank will be that we could see such second-round inflation pressure. And that is what any interest rate hikes are intended to time,” explains Moolman.

Inflationary pressures and supply shocks have also seen several central banks globally tightening monetary policy this month.

Makwe Masilela of Makwe Fund Managers elaborates: “Our consumer inflation is sitting at 4.3 so that itself curtails you that inflation continues to go up let alone the fact that most of our trading partners developed central bankers they’ve also started increasing their interest rates.”

“Unfortunately oil prices as well continue to be at elevated levels. So, you also don’t want to be behind the curve. So we think that the reserve bank on Wednesday will probably increase interest rates by 25 basis points.”

The reserve bank is expected to take a similar direction to the US Federal Reserve Bank which hiked rates by a quarter of percent for the first time in three years while the Bank of Japan also raised rates by 25-basis points for the first time in over thirty years.

VIDEO | Economists expect a possible rate hike this week