South Africa’s near-term inflation outlook has deteriorated significantly, with uncertainty about the duration of the Middle East war, the extent of infrastructure damage and the magnitude of second-round effects skewing risks to the upside, the central bank said on Tuesday.
In the first edition of its monetary policy review published twice a year, the South African Reserve Bank says its baseline forecast, which assumes a less protracted conflict, would see headline inflation peaking at 4% in the second quarter of this year before easing to its 3% target by late 2027.
The Bank has a constitutional mandate to maintain price stability in the interest of balanced and sustainable economic growth and now targets consumer inflation of 3% towards this end, with a tolerance band of plus or minus one percentage point. The new target, adopted last year, replaced the previous 3%–6% target band set in 2000.
“The escalating conflict in the Middle East and rising oil prices have renewed upward pressure on global inflation, raising expectations of disinflation reversal,” it says in the review.
“Most major central banks have paused policy easing at recent meetings amid heightened uncertainty and are expected to remain cautious, guided by incoming data and the balance of risks.”
At the start of the year, economists were pencilling in as many as two domestic interest rate reductions as inflation eased towards the 3% target, but the Middle East conflict has all but dashed those hopes for indebted consumers. At its most recent policy meeting, in March, the Bank kept its benchmark policy rate at 6.75%, signalling concerns about the inflation outlook.
Earlier this week, Bank of America joined a growing chorus of market pundits who expect the Bank to hike interest rates when it concludes the next meeting on May 28. Last week Citi also said it now expects the Reserve Bank to raise interest rates by 25 basis points in May and July.
This is despite GDP growth still being seen muted at 1.4% this year from 1.1% in 2025. The Bank warned that the recent oil shock has raised the peril of stagflation — an economic condition characterised by simultaneous slowing economic growth, high unemployment and rising inflation.
It said household consumption would still underpin growth, but a sustained rise in fuel prices could significantly erode real disposable income, while fuel shortages could disrupt production and weaken activity.
“The conflict, with ongoing trade tensions, may accelerate the establishment of parallel supply chains, potentially raising inflation further as countries trade off efficiency for resilience,” it warns.
“Central banks are generally anticipated to pause rate cuts this year, reflecting still high uncertainty and the upward shift in short-term inflation expectations. Markets are now pricing in rate increases in many jurisdictions ― a marked reversal from their expectations by January this year.”
Whether the shock proves temporary will depend on the duration of the conflict, the scale of damage to energy infrastructures and the extent of second-round effects, it says. Indications of infrastructure damage imply a delayed return to full production when the conflict ends.
As South Africa is a net importer it is particularly vulnerable to inflation risks stemming from higher fuel costs.
“Monetary policy cannot prevent the direct impacts of higher energy prices as these reflect in surveyed inflation immediately. Its role is to prevent broader and persistent inflation pressures through second-round dynamics in wages and inflation expectations,” the Bank says in the review.
But it adds that despite uncertainty about the conflict’s duration and the energy price path, South Africa is in a stronger position than during the 2022 energy price shock triggered by the Russia-Ukraine war, with derisking measures, including the 3% inflation target and ongoing fiscal consolidation, contributing to lower risk premiums and a more resilient exchange rate.
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