The South African Reserve Bank defied expectations and held interest rates steady to support economic growth after revising its inflation forecasts lower, while warning that the renewed conflict in the Middle East could justify more tightening.

The six-member monetary policy committee maintained the benchmark policy rate at 7%, Governor Lesetja Kganyago told reporters in Pretoria on Thursday. Only three of 20 economists surveyed by Bloomberg had expected a hold. The rest predicted a 25 basis point increase.

“The inflation outlook has improved slightly since our last meeting, but inflation is still too high, while growth is weak,” Kganyago said. “We are setting policy to achieve 3% inflation over time, ensuring the current supply shock does not de-anchor inflation expectations.”

Four members backed the hold and two favoured a 25-basis point increase.

The committee highlighted risks to growth from weaker consumer and business confidence, while noting that most of the inflation overshoot has so far come from higher fuel costs. It said goods prices have been relatively well contained, while cautioning that for services inflation, conditions look problematic.

While policymakers held steady as oil and urea prices spiked this month after the intensification of fighting between the US and Iran, they outlined a scenario in which they would need to hike again if consumer prices remain persistently above their 3% target and spills into food costs and core inflation.

The fallout from the Middle East conflict has impacted inflation across the world. South Africa’s decision follows rate holds in Nigeria and Canada this month and hikes in Ethiopia and South Korea.

South African inflation rose at its fastest pace in two years in June to 5%, moving further away from the central bank’s 3% target. It is forecast to stay about 4% until early next year and is now seen averaging 4% over 2026 as a whole, compared with 4.4% previously.

Officials see economic growth at 1.4% this year, compared with a previous forecast of 1.2% while warning that it could slow in the second and third quarters.

Their closely watched quarterly projection model showed adjustments for the policy rate to 6.79% by year end from 6.7%.