Fed Hikes Rates as Energy Costs Fuel Inflation Risk and SARB Decision Comes Into Focus

The US Federal Reserve delivered its first interest rate hike since 2023, increasing rates by 25 basis points as policymakers responded to inflation that remains above target. TreasuryONE currency strategist André Cilliers described the decision as appropriate given that the US labour market and broader economy remain relatively resilient. With inflation now the more pressing concern, markets are also beginning to price in the possibility of further rate increases.

Energy prices remain a significant part of the inflation outlook. Oil is still trading above $100 a barrel, but TreasuryONE highlighted the widening spread between crude oil and diesel prices as an additional concern. Damage to refining capacity and low inventories mean that even if geopolitical tensions ease and crude prices fall, diesel prices may remain elevated. These higher energy costs could increasingly feed into broader prices through second-round inflation effects.

Attention now turns to the South African Reserve Bank, which is due to announce its latest interest rate decision this week. While the rand remains resilient and the inflation outlook has improved slightly from previous forecasts, TreasuryONE believes the MPC will remain focused on protecting the 3% inflation target. Cilliers puts the probability of a 25-basis-point increase at around 80%, with food-price risks linked to El Niño and higher energy costs adding to the case for caution.

For the rand, much of the expected rate increase appears to have already been priced into the market. TreasuryONE therefore sees a decision to leave rates unchanged as the greater potential surprise, which could place the currency under pressure and add further pressure to imported fuel costs. For now, the rand remains relatively stable around the R16.00 to R16.30 area, with this week’s SARB decision likely to determine the next short-term move.