Goldman Sachs expects South Africa to raise interest rates twice this year after previously seeing a series of cuts, as the Iran war fans inflation risks around the world.

The bank forecasts quarter-point increases at the central bank’s meetings in May and July, after raising its oil-price and inflation assumptions in response to ongoing tensions in the Middle East, Goldman economist Andrew Matheny said in an interview.

“We have shifted to a baseline for two rate hikes,” Matheny said, adding that the likelihood of larger half-point increases remained “quite low.”

“Prior to the Iran war, we had been forecasting rate cuts at alternating meetings down to a 5% terminal rate,” he said, implying 75 basis points of easing in 2026. Goldman still sees the central bank lowering the policy rate to 5% — arriving there in 2029 — but now has “50 basis points of hikes before returning to a structural cutting cycle.”

South African Reserve Bank Governor Lesetja Kganyago and his colleagues held interest rates at 6.75% at the last monetary policy committee meeting in March, while warning that the risks to price pressures had risen since the US and Israel attacked Iran on February 28. The MPC will deliver its next policy decision on May 28.

Matheny now expects South African inflation to average 4% this year, before slowing to 3.4% in 2027, with price growth likely to hover between 4% and 4.5% over the coming quarters.

That could bring added pressure to bear on the SARB to tighten as policymakers seek to guide inflation down to the 3% target they adopted last year, potentially making them more sensitive to supply-driven price shocks.

The longer the Iran conflict drags on, the greater the risk that higher diesel and fertiliser costs spill into broader food inflation, Matheny said.

While he described the case for tightening as “borderline,” he said persistent inflation risks now tilt the balance toward additional hikes.

The more hawkish monetary policy outlook comes even as Goldman maintains a constructive view on South Africa’s sovereign credit trajectory and broader economy.

“The positive fiscal story is still intact,” he said.

Goldman estimates South Africa’s budget deficit narrowed to 4.3% of gross domestic product in the fiscal year through March, outperforming the National Treasury’s February projection of 4.5%, while the country posted a primary surplus for a third consecutive year.

That fiscal out-performance may support sovereign credit-rating upgrades over the coming months, according to Matheny.

Matheny said Moody’s Ratings may revise South Africa’s outlook to positive at its review expected next week, while S&P Global Ratings could ultimately raise the country’s rating to BB+ — one notch below investment grade — if the global economy avoids a deeper slowdown linked to the Iran conflict.

Goldman’s baseline view is that disruptions to oil flows ease by the end of June, allowing crude prices to moderate to about $90 a barrel by year-end. But the bank warned risks remain skewed upward, with more adverse scenarios placing oil between $100 and $115 a barrel.

Even so, it doesn’t currently see the Iran war triggering a global recession and recently lowered its probability for a US downturn.

Provided the global economy remains intact, Matheny said markets may still be underpricing South Africa’s improving ratings momentum.