South Africa’s (SA) central bank said this Tuesday that the Iran war presented material upside risks to the country’s inflation trajectory, with markets pricing in ​two interest rate hikes this year, but that it still expected ‌inflation to remain within the tolerance band of one percentage point above the 3% inflation target.

The South African Reserve Bank (SARB) said that it expects headline inflation to be higher ​in the near term and average 3.7% this year before easing back ​to target by late 2027.

In its twice-yearly Monetary Policy Review, the ⁠central bank said the energy shock was expected to affect but not ​derail the country’s transition to its 3% inflation target.

“Uncertainty regarding the duration of ​the Middle East conflict, the extent of infrastructure damage and the magnitude of second-round effects skews risks to the upside,” it said.

Inflation was at 3% in February, the latest available ​data showed, but this was before the Middle East conflict began.

In its March ​monetary policy committee statement, the bank showed two scenarios for the inflation outlook, one “intermediate” and ‌one “severe”.

In ⁠the severe scenario, oil remains above $97 per barrel for the year and inflation is expected to be sharply higher, and the inflation target will not be met within the forecast horizon, reflecting a larger and longer-lasting shock.

The SARB also ​said market-implied interest rate ​expectations now suggest ⁠scope for about two 25 basis-point hikes this year. This contrasts with two cuts in 2026 that were anticipated ​just before the conflict began.

The SARB said that despite the ​uncertainty around ⁠the war’s duration, the country was in a stronger position now than during the 2022 energy price shock thanks to a lower inflation target and ongoing fiscal ⁠consolidation ​that had lowered the risk premium.

The bank’s Monetary ​Policy Committee has held its key rate at 6.75% at every meeting this year since reducing it by ​25 basis points in November 2025.

–Reuters–