Reserve Bank piles pressure on SA businesses as oil and bond yields surge

South African businesses face a tougher financing and operating environment after the Reserve Bank raised its benchmark interest rate, as a global surge in oil prices and bond yields renews inflation concerns.

The South African Reserve Bank raised the repo rate by 25 basis points to 7.25%, effective from 25 September, in a unanimous decision driven largely by the worsening global oil shock and the risk of higher fuel costs feeding into broader inflation.

The decision follows a rise in South Africa's annual consumer inflation to 4.4% in August from 4.3% in July, with transport costs among the largest contributors; Statistics South Africa recorded transport inflation running at 8.8% in August.

For companies, the increase raises borrowing costs just as international markets are also repricing the cost of money.

Brent crude rose sharply in the latest session to around $107 a barrel, with US West Texas Intermediate climbing above $95, a move linked to continuing geopolitical tension and uncertainty over oil supplies and the Strait of Hormuz, with implications for South African transport, logistics, manufacturing, agricultural and electricity-related costs, as well as for the rand and the country's import bill.

The SARB warned that petrol prices are rising again after easing between June and August, with the average fuel-price under-recovery already at R2.83 a litre at the time of its September meeting; it now expects headline inflation to move above 5% later this year and into early 2027 before easing as the fuel shock subsides, and has cut its 2026 growth forecast to 1.2%, from 1.4%, after the economy contracted 0.2% in the second quarter.

The pressure is not confined to South Africa. US Treasury yields have surged as investors reassess the inflation and interest-rate outlook, with the 10-year yield reaching 5.18% – its highest level since 2007 – and the 30-year yield climbing to about 5.47%, its strongest level since 2004, developments that matter to South African companies because global bond markets influence the cost of capital, equity valuations and corporate debt markets across emerging economies. The latest moves reflect concern that higher energy prices could slow the pace of central bank easing generally.

S&P Global's September flash PMI showed business activity across major developed economies accelerating to its strongest pace in four and a half years, led by the United States, where manufacturing and services activity both picked up and employment growth outpaced other major economies; US initial jobless claims fell to 197,000 in the week to 19 September. Markets were pricing a 66% probability of a further Federal Reserve rate increase in October as of Thursday trading, Reuters reported.

The eurozone recorded its strongest expansion since April 2023 despite higher energy prices, according to S&P Global, while Japan remained in expansion territory even as its flash manufacturing PMI eased to 54.1 in September from 54.9 in August; the UK remained the weakest performer among the major developed economies covered by the data.

For South African business, the combination of higher domestic interest rates, expensive oil and elevated global borrowing costs raises financing costs for companies with variable-rate debt, with fuel-intensive sectors such as transport, logistics, agriculture, manufacturing and construction facing the greatest exposure, and consumer discretionary spending likely to come under further pressure if fuel and service-price inflation accelerates.

The Reserve Bank noted an important counterpoint, however: a resilient rand has helped contain imported inflation, and food inflation is currently at its lowest level since 2010.

The SARB expects the policy rate to remain broadly stable for the rest of the year under its current forecast, while stressing it will act again if inflation becomes entrenched.