South Africa inflation outlook shifts as SARB warns

South Africa inflation expectations are edging away from the central bank’s target, and policymakers are beginning to spot early “second-round” effects that could entrench higher prices.

South African Reserve Bank (SARB) Governor Lesetja Kganyago said in an interview with CNBC Africa on Friday that underlying pressures are building, making it necessary for the bank to respond to shifting expectations in the economy.

Expectations drift adds urgency for policymakers

Kganyago said the SARB’s decision in May to raise the benchmark interest rate by 25 basis points to 7%—its first increase in three years—was made without the most recent inflation expectations data.

With the latest readings now available, he argued that expectations have “drifted away from target,” which can influence wage negotiations, pricing decisions, and longer-term contracts. “All price setters are expecting inflation higher,” Kganyago said, adding that containing those expectations is a core task for the central bank.

Second-round inflation effects refer to the process by which an initial price shock feeds into broader, self-reinforcing increases across the economy, often via wages and business pricing strategies. Central banks typically act to prevent those dynamics from becoming persistent.

Core inflation rises as headline measure accelerates

Kganyago pointed to firmer core inflation as a sign that inflation pressure is not limited to volatile components such as food and fuel. Core inflation, which strips out those swings, rose to 3.8% last month from 3.6% previously, he said.

Headline inflation also moved higher, accelerating to 4.5% from 4%. While that remains within South Africa’s official inflation target range, the recent uptick in both measures underscores the risk that price increases could broaden.

Kganyago said core inflation is expected to peak only in the first quarter of next year, suggesting policymakers see inflation pressure persisting beyond the immediate period. A delayed peak can complicate policy decisions because rate changes typically affect the economy with a lag.

SARB reiterates 3% target amid expectations for more hikes

The governor reiterated the SARB’s commitment to returning inflation to a 3% target, a level the bank has frequently emphasized as central to price stability and longer-term planning. Anchoring expectations around that goal is meant to reduce the risk of households and firms building in higher inflation when setting prices and wages.

The bank’s tightening in May marked a notable shift after a three-year stretch without rate increases. Kganyago’s comments signal that the SARB is focused not only on current inflation readings but also on forward-looking indicators such as expectations and underlying momentum in core prices.

Market attention is now on whether the central bank will follow up with additional tightening. Economists surveyed by Bloomberg over the past week expect the SARB to raise interest rates again, reinforcing the idea that policy may remain restrictive until expectations move closer to target.

For households and businesses, the policy debate matters because higher borrowing costs can weigh on credit demand and spending, while allowing expectations to rise unchecked can make inflation harder and costlier to bring down later. The next key signals will come from updated expectations measures, core inflation trends, and the SARB’s guidance on how quickly it wants inflation to converge toward 3%.