The South African Reserve Bank has expressed concerns about rising inflation risks due to global oil market turmoil caused by the Middle East war. In its 2026 monetary policy review, the Bank defended its decision to raise interest rates twice this year, citing a measured approach to prevent the energy shock from creating a persistent inflation challenge. The Bank's monetary policy committee has taken a proactive stance to contain inflation expectations.
The Bank's actions have been likened to firefighting, aiming to extinguish the inflation fire before it gains full force. Headline consumer inflation is expected to remain above the upper limit of the 3% target band into 2027 before converging to target from late 2027. The Bank has cited uncertainty around the resolution of conflicts in the Middle East and between Russia and Ukraine as potential risks to inflation.
The South African government recently announced steep increases in petrol and diesel prices, with 95-grade petrol now costing nearly 50% more than it did in March. The wholesale price of diesel has leapt 72% over the same period. As a net importer of crude oil and finished petroleum products, South Africa has endured steep fuel price increases since April due to the war in Iran.
The Reserve Bank's monetary policy review highlighted the risk of second-round effects, where the oil shock spreads into generalised inflation with rising wages and prices. The Bank has emphasised that policy cannot wait for clear evidence of second-round effects, as monetary policy operates with long lags. Inflation is considered a regressive tax that hurts the least well-off citizens the most.
The Bank has hiked interest rates by a cumulative 50 basis points this year, despite a weak economy that grew by just 0.4% in the first quarter and contracted by 0.2% in the second. The Bank has reiterated its 1.2% growth forecast for 2026, rising gradually towards 2% by 2029 as structural reforms progress. Domestic reforms are seen as crucial to macroeconomic resilience and economic growth.
The Reserve Bank has identified fixing local government and improving the performance of logistics and energy as immediate priorities for domestic reforms. Household consumption is expected to remain the main driver of growth, although its contribution has been revised down due to weaker real disposable income growth. Real wages declined by 0.5% month-on-month in August and 2.6% over the same period in 2025.
The Bank's review noted that risks are tilted to the upside, with potential for a marked rand depreciation to raise imported inflation and increase exchange rate pass-through. The Bank's goal is to guard against the risk that persistent fuel, administered price, and food shocks become embedded in expectations and wages, undermining the credibility of the inflation target.
Key points
- The South African Reserve Bank has raised interest rates twice this year to combat rising inflation risks.
- The Bank expects headline consumer inflation to remain above the upper limit of the 3% target band into 2027.
- Domestic reforms are seen as crucial to macroeconomic resilience and economic growth.
