Prolonged US/Iran conflict triggers SA interest rate hike and lower growth forecast

Our weekly podcast by Kevin Lings:

SARB aims to check rising inflation with 25 bps interest rate hike

In this podcast, STANLIB’s Chief Economist, Kevin Lings, discusses the SARB’s decision to hike interest rates by 25 bps and the risk of more hikes if the US/Iran conflict continues. The SARB indicated it was concerned about second-round effects from the higher oil price and remains determined to achieve its 3% inflation goal. Kevin also analyses latest SA government revenue collection data.

The focus areas during the week included:

The S&P 500 index gained 1.4%. It has risen in each of the past nine weeks, which is a very rare occurrence historically. In fact, over the past 70 years, this has only happened 12 other times. Investor sentiment was buoyed by reports that the US and Iran were moving towards a 60-day ceasefire extension, which would include reopening traffic through the Strait of Hormuz. This helped to push oil prices lower and supported risk appetite. However, at the end of the week Iran’s chief negotiator, Mohammad Bagher Qalibaf, said that the country will not accept any agreement until its national rights are fully secured and that Iran does not trust promises made by opposing parties. Only objective results matter. Year-to-date the S&P 500 is up 10.7%, having increased by a very impressive 19.5% since the low on 30 March.

US government bonds generated positive returns as yields declined across most maturities, partially in response to declining oil prices and reported progress in the US/Iran negotiations. On Friday afternoon, the yield on the benchmark 10-year US government bond traded at 4.45%, down from 4.56% at the end of the previous week. The yield has fallen by about 20 bps (0.20%) from its recent peak on 19 May, helped by moderating inflation concerns. This suggests investors may be gaining some confidence that inflation risks are becoming more contained, even if the path back to the US Federal Reserve’s (Fed) 2% target is long and uneven.

The STOXX Europe 600 index gained a modest 0.1%, while Japan's equity markets surged to historic highs. The Nikkei 225 Index rose by 4.7% and the broader TOPIX Index gained 1.7%. SA’s All-Share Index added 1.3%, boosted by a 3% rise in the Resource 10 index, but it is still down 1% in the year to date.

The South African Reserve Bank (SARB) decided to increase the repo rate (repurchase rate) by 25 bps to 7% at its Monetary Policy Committee (MPC) meeting. The decision was not unanimous: two MPC members argued that rates should remain unchanged. The increase was in line with market expectations, although prior to the start of the Iran conflict early this year the expectation was for two rate cuts in the second half of 2026. The tone of the MPC statement was, understandably, hawkish. It suggested that further rate hikes in the coming months are possible - depending on the strength of secondary inflationary effects. In the Q&A session, the governor highlighted that that a hike of 50 bps was extensively debated by the MPC. In response to the higher fuel price, the SARB lowered its 2026 GDP growth forecast from 1.4% to 1.2% and also reduced the 2027 forecast from 1.9% to 1.7%. The domestic economy is facing “a painful combination of higher global uncertainty and reduced household disposable income within SA”, it said. The risks to growth are to the downside. In addition, the SARB’s forecast for headline inflation in 2026 was revised up from 3.7% to 4.4%, while for 2027 the forecast was lifted from 3.3% to 3.7%. These projections entail some second-round effects, as the shock will broaden out into wages and inflation expectations.

National Treasury released its April 2026 statement of revenue, expenditure and borrowing. This is the first monthly statement for the 2026/27 financial year. The data shows that SA’s gross tax revenue for April 2026 was R133.6 billion, accounting for 6.3% of the annual budget, which is slightly ahead of official expectations. While it is too early to make any deductions, the April level of revenue is above the 5.8% annual growth rate required to achieve budgeted tax revenue for 2026/27, helped by strong personal income tax (PIT) collection, VAT revenue and increased corporate tax receipts. In contrast, there was an understandable decline in the general fuel levy, which fell by -53.8% y/y in April. The sharp drop in fuel levy collection reflected the temporary R3/l reduction in the general fuel levy announced by the Minister of Finance effective 1 April 2026. Government’s main budget expenditure grew by 7.1% y/y, well above the budgeted growth of 2.5%. Fortunately, the budget deficit was R63.6 billion in April, 1.6% smaller than last year’s deficit in April, amid significantly higher tax collection.

South African private sector credit extension increased by R19.08 billion (+0.4% m/m) in April. This follows a disappointing decline of -R0.76 billion (-0.01% m/m) in March. Over the past year, the growth in private sector credit reaccelerated to 9.2% y/y compared to 8.5% y/y in March, above market expectations for growth of 8.4% y/y (Bloomberg). The monthly breakdown of credit extension shows that corporates drove most of the increase, rising by a solid R14.2 billion (+0.5% m/m), while consumer credit increased by R4.9 billion (+0.2% m/m). Although household credit remains relatively subdued, growing below its long-term average over the past two years, it has gained some momentum since mid-2025.

In April 2026, the annual rate of growth in South African broad money supply (M3) increased to 9.8% from 9% y/y in March. This is the fastest growth in money supply since June 2023. In 2025 money supply grew by an average of 6.8%, which was up from 6.3% in 2024.

In April 2026, SA’s producer price index (PPI) rose by a substantial 3% m/m, driven almost entirely by the surge in fuel prices. This was above market expectations for prices to increase by 2.8% m/m (Bloomberg) and follows a 1.1% m/m increase in March. Consequently, headline producer inflation jumped to 4.8% y/y in April, the highest level since April 2024 and well above the SARB’s 3% target.

US Fed Governor Lisa Cook indicated she was prepared to raise rates if inflation continued moving in the wrong direction, while Vice Chair Philip Jefferson said policy was well positioned but inflation risks remained “tilted to the upside”. Other officials highlighted risks from energy prices, supply chain disruptions, and uncertainty whether AI-driven productivity gains could ultimately affect inflation.

The US PCE price index rose by 0.4% m/m in April 2026 (mainly because of higher energy price), which was below market expectations for an increase of 0.5% m/m, and down from 0.7% m/m in March. On an annual basis, however, PCE inflation accelerated to 3.8% from 3.5% in March - the highest reading since May 2023. Core PCE inflation rose by 0.2% m/m (also below market expectations for an increase of 0.3% m/m) and by 3.3% on an annual basis. The April reading brought the three-month annualised rate of core PCE to 3.8%, underscoring that near-term inflation pressures remain above the Fed’s 2% target. Overall, the PCE inflation data supports the view that the Fed can maintain a patient interest rates approach, but with risk to the upside.

The US Conference Board's Consumer Confidence Index declined to 93.1 in May, marking its first drop in four months. The decline was smaller than forecast. Concerns about the economy were driven by inflation, oil and gas prices, and geopolitical risks. Despite the decline, the index is modestly below its historical average, suggesting that consumer attitudes, while cautious, have not weakened as sharply as some other sentiment measures imply. This contrasts with the University of Michigan Consumer Sentiment Index, which reached a record low in April. Key drivers of the difference include the Conference Board's heavier focus on employment and the labour market, while in the University of Michigan's survey personal finances carry a more significant weight. Overall, consumer spending has remained resilient despite weak sentiment, supported by a stable labour market and generally healthy household balance sheets.

The US Bureau of Economic Analysis (BEA) revised the US Q1 2026 GDP growth rate down from 2% to 1.6%. The downward revision was primarily driven by more modest growth in fixed investment activity and consumer spending. Despite the downward revision, GDP is up from growth of only 0.5% in Q4 2025, with the quarter-on-quarter acceleration reflecting higher government spending and increased exports.

In April US durable goods orders rose by 7.9% m/m, up from a revised 1.3% m/m increase in March. The April increase was mainly driven by a 21.5% jump in orders for transportation equipment. Orders excluding transportation increased by only 1.1%. However, core capital goods orders, a proxy for business investment, fell 1.1% after a strong gain in March.

The published minutes of the European Central Bank’s (ECB) monetary policy meeting in late April suggested that some members were open to raising rates. The central bank warned that the energy price shock had been both large and “highly persistent.” It noted that the war in the Middle East was weighing on energy markets, confidence, and near-term growth prospects. Separately, various board officials publicly signalled that a June interest rate hike is likely.

China’s industrial profits rose by 24.7% y/y in April from 15.8% y/y in March. Profits in the January-to-April period increased by 18.2% y/y, supported by stronger earnings in the energy and raw materials sectors as well as resilient external demand for technology-related exports (according to National Bureau of Statistics data). In contrast, several consumer-facing industries, including furniture manufacturing and automotive production, reported weaker profitability. The weakness in consumer-facing industries and property-linked activity reinforced the view that China’s recovery remains uneven and dependent on external demand and policy support.

China escalated its crackdown on illegal cross-border securities activities, with the China Securities Regulatory Commission (CSRC) imposing fines and rectification measures on several online brokerages operating in mainland China without the required licences. The regulator moved against UP Fintech Holding-owned Tiger Brokers, Futu Holdings, and Longbridge Securities for violating securities regulations governing cross-border brokerage activities. Futu and UP Fintech said they would co-operate with regulatory requirements, while Longbridge said it would implement the required rectification measures, according to Bloomberg News. The news triggered sharp declines in offshore-listed Chinese brokerage shares and weighed on Hong Kong market sentiment during the week.

Tokyo's core consumer price index rose by 1.3% y/y in May, decelerating from 1.5% in April and below market expectations for inflation to remain unchanged at 1.5%. The reading marked the sixth consecutive month of deceleration and the fourth straight month below the Bank of Japan's (BoJ) 2% target, as government energy subsidies and private school fee relief continued to weigh on prices. The softer inflation reading added a degree of uncertainty to the June rate-hike debate.