Serious storm is set to hit South Africa

South Africa is enjoying a period of calm before the storm from the Middle East sends inflation sharply higher and forces the Reserve Bank to hike interest rates. 

The only question is how severe and prolonged the storm will be, with the country in a better position to handle it than in the immediate aftermath of the Russian invasion of Ukraine. 

South Africa’s government finances are in a better place than they were four years ago, and inflation was relatively calm at the Reserve Bank’s 3% target prior to the US-Israeli war on Iran, which began at the end of February 2026. 

The Centre for Risk Analysis (CRA) explained that South Africans can only expect the April inflation data to be released in May, which will fully capture the initial effects of the war in the Middle East. 

“March’s consumer price index (CPI) number of 3.1% looks, at first glance, like a story about nothing: a one-tenth of a percentage point nudge above February’s on-target reading of 3.0%,” the CRA said. 

“This was broadly in line with expectations. But, look closer, and it is the last calm before a storm that the CRA has been warning about for weeks.”

The April CPI data will capture the first impact of the steepest one-off fuel price increases South Africa has seen in over two decades. 

This initial price hike is not the largest concern. Rather, the second-round effects on other prices in the economy, which are stickier, are the Reserve Bank’s main issue. 

The CRA explained that the full effects will only be seen in prices and the wider economy over time, as businesses raise prices and pass on rising costs to consumers.  

The Reserve Bank’s April Monetary Policy Review (MPR) projects headline inflation to peak at 4.0% in the second quarter before retreating toward the 3% target. It only expects inflation to return to this level in late 2027.

Crucially, the CRA said the bank’s tone in the most recent review is notably more hawkish than previous editions, with it seeing the current environment as a test of its credibility in managing inflation at a new target. 

The bank has held the policy rate at 6.75% at both its January and March meetings. The MPR reveals that in January, the Monetary Policy Committee overrode its own Quarterly Projection Model, which had suggested a cut. 

“This indicates the committee was already repositioning its risk calculus before the Middle East conflict fully materialised,” the CRA said. 

“By March, that caution had hardened. Forward rate agreements have since shifted to price in approximately two 25-basis-point hikes this year, a reversal of roughly 100 basis points from expectations prevailing before the conflict began.” 

The tables turn

This marks a broader turn in South Africa’s fortunes at the beginning of 2026, with widespread optimism giving way to growing concern about the country’s prospects. 

The shift in interest rate expectations will place increased emphasis on the government’s reform agenda, which can no longer be masked by cyclical tailwinds from lower inflation and falling interest rates. 

These factors helped boost consumer spending and broader economic growth, with disposable income finally growing faster than inflation. 

This script was broadly expected to continue into 2026, with further interest rate cuts on the horizon, faster growth, and improved state finances all translating into significantly improved sentiment. 

Old Mutual Investment Group’s (OMIG) Sisamkele Kobus expected the Reserve Bank to cut interest rates by a cumulative 75 basis points in 2026. 

“I was one of the most bullish ones with regard to the Reserve Bank and monetary policy prior to the war,” Kobus explained. 

“I thought the central bank could drop the repo rate to 6% by the end of 2026, with cumulative interest rate cuts of 325 basis points during the cycle. That was my base case before the war.”

However, Kobus is now pencilling in 50 basis points of hikes in 2026, with the first increase likely to take place in July. 

Kobus explained that the Reserve Bank has some space to wait for more data before making its first move, given its caution earlier in the year and inflation settling in at 3%. 

There is still a chance that it will hike rates in May, but it will probably wait for more conclusive data regarding the war’s effects on prices in the economy. 

A cumulative 50 basis points in hikes will not reverse the progress made over the past two years, but it will have a notable impact on consumer spending and growth. 

Higher interest rates will translate into increased debt repayments, which will erode disposable income and consumer spending. 

Kobus thinks the impact will not be as severe as some expect, with economic growth still being above 1% for the year. 

Nedbank CEO Jason Quinn is slightly more optimistic, with the bank expecting 1.3% GDP growth in 2026 after the impact of the Middle East conflict is taken into account.

“Following our initial assessment of developments in the Middle East, which have resulted in significantly higher oil prices, we now expect inflation to increase to above 4% in 2026,” Quinn said. 

In the bank’s worst-case scenario, inflation could even cross 5% if the war is prolonged and its impacts across markets deepen. 

“As a result, we are not likely to see any interest rate cuts this year. Our GDP growth forecast for 2026 has also been trimmed to 1.3%,” Quinn said.