Eskom electricity price hikes spell trouble for interest rates in South Africa

South Africa’s high electricity tariffs, which are only expected to grow, present a significant inflationary threat.

These high prices will not only strain consumer finances but also make the Reserve Bank’s job of managing inflation more difficult.

This is feedback from the Bureau for Economic Research’s (BER) Roy Havemann, who explained that high administered price inflation is one of the key challenges in bringing inflation down to 3%.

Havemann’s comments come after the National Energy Regulator of South Africa (Nersa) reached an out-of-court settlement agreement with Eskom on the Sixth Multi-Year Price Determination (MYPD6).

As part of this settlement, Nersa acknowledged errors in depreciation and asset valuation that had underestimated Eskom’s allowable revenue. 

As a result, the regulator agreed that Eskom is entitled to an additional R54 billion across the MYPD6 period. 

This additional R54 billion will be phased into tariff increases of around 8.8% per year for the 2026/27 and 2027/28 financial years, up from earlier projections of 5.4% and 6.2%.

Havemann explained that this Eskom–NERSA tariff settlement will put upward pressure on inflation over the medium term. 

“Electricity tariffs feed directly into the CPI basket, where administered prices already make up a sizable share,” he explained. 

This is because electricity is a universal input in production, as it is used across various industries in the economy to produce goods and services.

Therefore, changes in electricity prices are felt across the economy, raising its entire cost base.

Havemann said the revised hikes of about 8.8% in 2026/27 and 2027/28 mean electricity will be one of the fastest-rising components of inflation. 

In South Africa, electricity prices have risen far faster than inflation since 2000, with the cost of energy rising just over ten times as Eskom’s performance has deteriorated and its finances came under pressure.

This has not only made electricity far more expensive for South African households but also led to significant inflationary pressure.

The rise in Eskom’s electricity tariffs compared to inflation can be seen in the graph below.

Reserve Bank inflation target under pressure

Havemann said the BER’s baseline forecast had already pencilled in higher increases than those initially granted by NERSA.

“That said, the broader impact comes through second-round effects: higher electricity costs raise operating expenses for businesses, particularly in energy-intensive sectors like mining, manufacturing, and retail,” he explained. 

SolarAfrica’s head of commercial, Brandon Horn, said that, for large commercial and industrial users, the impact is severe. 

Horn explained that a typical Megaflex customer consuming around 10.5 GWh per year faces an extra R2 million in 2026/27, and close to R2.2 million in 2027/28, pushing their annual bill up by more than R4.1 million by 2028. 

“These costs are often passed on to consumers, amplifying inflationary pressures beyond the direct electricity component,” Havemann said. 

“For households, higher tariffs reduce disposable income, which can shift spending patterns.”

In macro terms, he said the Nersa-Eskom settlement could increase headline inflation by between 0.2 and 0.4 percentage points in the affected years.

“For the SARB, high administered price inflation is one of the key challenges in bringing down inflation to 3%, especially when tariff increases coincide with food or fuel price shocks,” he said.

This comes as the Reserve Bank is looking to target a lower inflation rate, from a range of 3% to 6%, down to 3%. 

While this change is not official or confirmed yet, the SARB has said it is looking to anchor inflation expectations around this lower target.

Administered prices for services like electricity have been a thorn in the Reserve Bank’s side for years, as their often above-inflation increases have made managing inflation increasingly difficult and kept interest rates higher.

Electricity tariffs make up the largest share at around 26% of the administered price basket and have a larger impact than, for example, fuel prices, which only make up about 3.8% of the basket.

Furthermore, electricity prices are effectively permanent increases, while fuel prices are highly volatile and have actually contributed to bringing inflation down in 2025.