PSG Economic commentary: June CPI inflation and MPC rate decision today

Today, Statistics South Africa will release the June CPI inflation data. The following day, Thursday (23 July), the Reserve Bank's Monetary Policy Committee (MPC) will announce its latest interest rate decision.

I expect headline inflation to rise from 4.5% in May to around 4.7% in June, reflecting a monthly increase of around 0.5%. The biggest impact will once again come from higher petrol prices, following the increase of 143 cents per litre during June. Food inflation should remain fairly moderate, while inflation in most consumer goods is still very subdued, much as we've seen over the past year.

While 4.7% is obviously higher than the Reserve Bank would like to see, it's important to remember that most of this increase is being driven by fuel prices. There is still very little evidence of meaningful second-round inflation effects. I expect inflation to ease back to around 4.3% in July (following a 201 cents per litre price reduction in petrol), remain around that level in August, and then drift towards 4.0% by year-end. On average, I expect inflation to come in at around 4.0% in 2026 before easing further to around 3.5% in 2027.

The June inflation number itself is unlikely to have much influence on the MPC decision the following day. The Reserve Bank would already have completed its own inflation forecasts before the official June data is released.

I've said for some time that, after the Reserve Bank's early and pre-emptive 25 basis point rate hike in May, it was unlikely they would need to raise rates again in July. The renewed conflict in the Middle East over the past week, and the resulting increase in oil prices, has certainly made that call more difficult.

There is a case for another rate hike. Oil prices have moved back up to around $85 per barrel, inflation expectations increased quite sharply in the second quarter, and the Reserve Bank will be concerned about the risk of second-round inflation effects developing over the coming months. They also remain firmly committed to anchoring inflation expectations closer to their preferred 3% target. Adding to this, daily petrol under-recoveries have widened again recently, suggesting that the expected fuel price relief may now be smaller than previously anticipated.

On the other hand, there are also good reasons to leave interest rates unchanged. The inflation expectations survey was conducted when oil prices were above $100 per barrel. Even after the recent increase, oil prices remain well below those levels, suggesting the survey probably overstates current inflation risks. Q3 inflation expectations is likey to dip again – depending on how the renewed war unfolds. More importantly, the Reserve Bank acted proactively in May. At the time, I argued that an early rate hike would reduce the need for further tightening later, and I still think that argument holds. It is also important to note that many other Central Banks have not hiked rates. In addition, the rand exchange rate has remained remarkably stable, easing some of the potential inflationary pressures.

There is also still very little evidence that higher fuel prices are feeding through into broader inflation. Wage settlements during the second quarter appear to be largely unchanged from the first quarter, suggesting that second-round inflation pressures remain limited.

I also expect the Reserve Bank to revise its inflation forecasts lower. At the May MPC meeting, it forecast average inflation of 4.4% for 2026 and 3.7% for 2027. Based on recent developments, those forecasts now look too high. I would expect the 2026 forecast to move closer to 4.0% and the 2027 forecast to around 3.5%.

Overall, I think this will be a very close call - closer than I expected before the renewed conflict in the Middle East. I also expect quite a divided MPC vote, with some members favouring another rate hike while others argue that the May increase was sufficient.

For now, I still lean towards the Reserve Bank leaving interest rates unchanged next week. The renewed conflict has undoubtedly increased the risks and made the decision much closer, but my base case remains that rates stay on hold. Looking beyond July, I still believe the inflation outlook is improving, with inflation gradually easing towards the end of the year as the effects of the earlier oil shock fade.

*Johann Els is Chief Economist at PSG Financial Services.