The Reserve Bank might have to raise interest rates in coming months due to uncertainty about the path of US interest rates, S&P Global Ratings said this week.
Such a development would mean that the projected cooling down of inflation in the South African economy and a cut in domestic interest rates later this year could be short-lived.
Samira Mensah, an associate at financial-services ratings at S&P, said on Tuesday that the international credit-rating agency expected interest rate hikes of 25-75 basis points in South Africa over the next 12 to 18 months.
Mensah, speaking on the sidelines of the S&P credit conference, said such a move by the Reserve Bank's monetary policy committee would depend on the developments in the US, where changes in the monetary policy stance may signal a reprieve for emerging-market currencies such as the rand.
US President Donald Trump is a supporter of a strong dollar, in principle, but he has blamed it for lack of competitiveness in global trade against countries such as China.
Trump supports low interest rates.
But on Wednesday the Federal Reserve - the US equivalent of the Reserve Bank - hiked US interest rates for the second time in three months by 25 basis points in line with market projections, and said that it expected at least two more hikes in 2017 as economic activity improved and inflation moved higher.
Mensah said that the Reserve Bank, which has kept South African interest rates on hold since the last time it raised the repo rate, by 25 basis points to 7% in March 2016, will not be under immediate pressure to raise rates when its monetary policy committee meets this week.
But the committee will be monitoring developments in the US closely.
"If things change over there from a monetary policy stance, it could have an impact on South African rates.
"If changes are made and accelerated versus a gradual change that could have an impact," Mensah said.
South Africa's inflation at 6.6% is considered relatively benign, although it remains stubbornly outside the Reserve Bank's 3%-6% target range.
"South Africa is exposed to [foreign] capital flows and the capital flows are linked to the price and availability of the US dollar," said Mensah.
The rand may be battered by outflows as investors seeking better yields are attracted to higher US interest rates. That would lead to higher inflation and cause the central bank to raise rates.
Surprisingly, after the US Federal Reserve decision to raise US rates, the rand firmed to R12.68 against the dollar: its best level in 18 months.
Econometrix chief economist Azar Jammine said: "Most economists have been predicting that in about 12-18 months interest rates will have to rise. It's mainly due to the US increase in interest rates. South Africa might have to match those increases to prevent the rand from depreciating."
It's unclear what the Reserve Bank's stance is. Jammine said: "The Reserve Bank has been trying to make people guess ... because there are strong calls for the Reserve Bank to reduce the repo rate and the bank is clearly reluctant to do so.
"So it keeps appeasing people by saying we are probably approaching the latter stages of the cycle's upper end ... they are doing this more to deflect criticism that they are not doing anything."
Poor economic growth and weak consumer and business confidence were among the reasons for the repo rate not being raised last year, even as food inflation remained in the double digits.
The National Treasury expects the economy to grow 1.3% in 2017 and 2% in 2018.
Retail sales remained weak into January, figures out on Wednesday showed. The Rand Merchant Bank-sponsored business confidence index was lacklustre, rising only two points in the first quarter of 2017.
FNB economist Mamello Matikinca said: "Weak consumer confidence, household credit demand and high unemployment will contain household expenditure growth during the first half of 2017." But inflation was expected to fall to 5.5% later this year and could boost consumer spending, although this might be tempered by rising taxes.
Wandile Sihlobo, head of economic and business intelligence at Agbiz, said that food inflation might decline from the second quarter of 2017 going into the third quarter, and could average 6%-9%. Given the rand's strength, it might result in cheaper imports. Good rains had improved crop yields.
KPMG economist Christie Viljoen said: "The Reserve Bank will make a 25 basis point adjustment this year if its inflation projections deteriorate." Jean-Michel Six, S&P chief European economist, said at the S&P conference that the risk to emerging markets from the US included uncertainty on the Fed's future monetary policy stance; five vacancies on the Federal Reserve's open market committee may be filled, with individuals more sensitive to Trump's looser monetary policy stance. This could influence the course of monetary policy in the US in a significant way, he said.
If the "prospects of much higher US interest rates were to become apparent, then we could see outflows exceeding inflows [in emerging markets], which would penalise growth in those markets."