Goldman Sachs swings to South Africa rate hike call as Iran war fuels inflation fears

Goldman Sachs has reversed its outlook for South Africa’s interest rates, now expecting the country’s central bank to raise borrowing costs twice this year as the Iran war drives up global inflation risks and energy prices.

According to African Economic Inc, the Wall Street bank said worsening geopolitical tensions and rising oil prices have forced a rethink of its earlier expectation that South Africa would continue cutting rates.

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Andrew Matheny, economist at Goldman Sachs, said the bank now expects the South African Reserve Bank to deliver two quarter point interest rate increases at its May and July meetings.

“We have shifted to a baseline for two rate hikes,” Matheny said, while adding that larger half point increases were still unlikely.

The new forecast marks a sharp turnaround from Goldman’s earlier position before the escalation of the Middle East conflict, when it had projected a gradual easing cycle that would eventually bring South Africa’s benchmark rate down to 5 percent over time.

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South Africa’s central bank left its key interest rate unchanged at 6.75  percent in March, but warned that rising geopolitical tensions and higher fuel costs were increasing inflation risks across the economy. Policymakers are due to announce their next decision on May 28.

Goldman now expects South African inflation to average 4 percent in 2026 before slowing to 3.4 percent in 2027. The bank said inflation is likely to remain between 4 percent and 4.5 percent in the coming quarters as higher oil prices filter through transport, diesel and fertiliser costs.

The bank warned that prolonged disruption linked to the Iran war could spill into wider food and transport prices, adding pressure on households and businesses already grappling with a fragile economic recovery.

Matheny described the case for tighter policy as “borderline,” but said persistent inflation risks had tilted the balance toward additional tightening.

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Despite the more hawkish outlook on rates, Goldman maintained a positive assessment of South Africa’s broader fiscal position and sovereign credit prospects.

“The positive fiscal story is still intact,” Matheny said.
Goldman estimates that South Africa’s budget deficit narrowed to four point three per cent of gross domestic product in the fiscal year through March, beating the National Treasury’s earlier forecast of 4.5 percent.

The country also posted a primary budget surplus for a third straight year, strengthening expectations that credit rating agencies could eventually reward the country with upgrades.

Matheny said Moody’s Ratings could revise South Africa’s outlook to positive in its next review, while S&P Global Ratings may ultimately raise the country’s sovereign rating to BB+, one notch below investment grade, if global economic conditions remain stable.

Goldman expects oil prices to ease toward ninety dollars a barrel by the end of the year if disruptions to global energy supplies begin to fade by the end of June.

However, the bank cautioned that a more severe escalation could send crude prices soaring to between $100 and $115 a barrel.

Even with growing uncertainty surrounding the conflict, Goldman said it does not currently expect the Iran crisis to trigger a global recession and believes investors may still be underestimating South Africa’s improving credit outlook.