Rising Middle East tensions pause increasing risk to SA's interest rate

Resurging war may force the SA Reserve Bank to put interest rates cut on pause in July

- SIPHELELE DLUDLA

THE resurging war in the Middle East may force the South African Reserve Bank (Sarb) to put interest rates cut on pause in July as the escalation of oil prices to a three-month high may affect both global and domestic inflation outlooks.

This comes as the Sarb last month reduced the policy rate by 25 basis points to 7.25% per annum, and the prime lending rate to 10.75% per annum, and revised down its inflation forecasts as consumer prices remained below the lower band of the 3-6% target range, currently at 2.8%.

The Sarb said this reflected the lower starting point, as well as a stronger exchange rate assumption and lower world oil prices, adding that these factors offset pressure on fuel costs from the higher fuel levy announced in the Budget.

However, a further rate cuts by another 25 basis points to 7% in July risks not materialising now as the surge and persistent elevation of oil prices could sway inflation to another direction.

Brent crude oil prices spiked as much as 13% on Friday, topping $78 a barrel intraday, before settling near $75 a barrel on Monday, its highest level since 3 April, after Israel and Iran broadened strikes against each other, heightening fears that escalating tensions could disrupt crude supplies from the Middle East.