Double blow for interest rate cuts in South Africa

South Africa’s inflation rate is set to face a double blow in the form of higher fuel prices and a weaker rand, threatening future interest rate cuts.

Both of these inflationary factors have been aggravated by the ongoing escalating conflict in the Middle East, which has seen the global oil price rise to over $100 per barrel.

While still expected to be short-lived, this war will have a noticeable inflationary impact in South Africa.

Investec chief economist Annabel Bishop recently explained that the Middle East war has seen oil prices spike.

The Brent crude oil price reached around $106/bbl on Monday, 16 March, stoking fears of significant fuel price increases in South Africa come April.

“Concerns have arisen that the oil supply interruption from the war will be greater than the stockpiled reserves,” Bishop explained.

This, she said, would limit but not prevent the escalation in oil prices globally, with inflation expectations rising.

“The petrol price under recovery has risen to R4.27/litre for April, a hefty price jump that would add around 1.0% year-on-year to South Africa’s inflation rate in that month, with fuel prices adjusted on rand petroleum product movements in the previous month,” she said.

Bishop explained that South Africa’s diesel price is estimated to rise by R7.04/litre in April, which is notable given that diesel is a key input to the country’s industrial production.

Luckily for motorists, she pointed out that roughly half of the fuel price in South Africa is taxes and levies, which are typically adjusted once a year, meaning large swings in international petroleum product prices in rands affect only around half the fuel price, providing some buffer.

However, she said the impact on inflation will still be very significant, particularly for producer price inflation, with substantial second-round effects from large jumps in the diesel price expected.

This, in turn, feeds into consumer price index inflation and weakens South Africa’s economic growth.

“While South Africa’s government may have scope to absorb some of the price increase, if temporary, inflation is still expected to rise in that month,” she said.

Rand and rates

At the same time, Bishop said escalating market aversion and the United States dollar’s strength are also weakening the rand, adding to inflationary pressures.

She explained that the US dollar’s strength comes from risk-off sentiment prevailing in financial markets, driven by concerns of a global economic slowdown resulting from globally high inflation.

The S&P Global Investment Manager Index explained that this has caused investors to rein back the expected benefit to equities from looser central bank policy to the lowest since last August. 

“Any fiscal policy-related boost to equities has also been scaled back to now sit at a near-neutral position,” the firm said.

This comes at a time when South Africa’s inflation has been below 4% since September 2024, when the Reserve Bank implemented its first interest rate cut in the current cycle.

In light of South Africa’s persistently low inflation, many economists expected the Reserve Bank to continue cutting rates in 2026.

While rate cuts are still on the cards for South Africa, hopes of this happening at the Monetary Policy Committee’s (MPC) March meeting have dimmed.

Reserve Bank Governor Lesetja Kganyago has made it clear that the MPC would like to see inflation at its 3% target, not above or below, and would set policy in reaction to any changes on a meeting-by-meeting basis.

In addition, Kganyago has repeatedly sounded the alarm over heightened global uncertainty and tensions, saying these trends are not sustainable. 

At the MPC’s January meeting, the governor explained that even quite large shocks would not push inflation outside the committee’s tolerance range of 3% plus or minus one. 

“We are trying to anchor expectations at 3%. Positive shocks get us there sooner, while negative shocks delay the process, but don’t block it,” he said. 

“Overall, monetary policy appears well-positioned to manage the range of shocks that might come our way.”

However, in light of the unprecedented uncertainty brought about by the US/Israel war against Iran, hopes for a rate cut anytime soon have dimmed.

Bishop said that a short, sharp war in the Middle East remains the base case, and while the intensification of the conflict is not unexpected, it has raised market risk.

This, she said, has seen hopes for a US interest rate cut fade, adding to economic growth concerns.

In her base case for South Africa, Bishop expects interest rates in South Africa to remain unchanged until the third quarter of the year.

In the third quarter of 2026, Bishop projects the repo rate will be cut by 25 basis points to 6.50%, where it is expected to stay until 2027.