Mike Tyson famously remarked that a plan is all very useful until you are smacked in the mouth. The South African economy has taken a snotklap in the form of an oil price shock accompanied by a weaker rand, an unexpected and disappointing development but by no means unprecedented.
Oil price and currency shocks have been a regular feature of recent global and economic history. Any helpfully realistic plan for the South African economy should include a credible strategy to deal with an oil price or currency shock. Do we have one?
We have often been here before, as the oil price cycle in rands and dollars reveals, though it also reveals that the oil price cycle looks very much the same. One can identify at least seven such shocks — in both directions — since 2000.
The stock market reacts in the same direction; share price volatility rises and falls with the oil price. An oil price shock is clearly bad news for South African-facing businesses and for their shareholders in pension and retirement funds, because of the negative implications for generating sales and earnings.
What is our economic plan and how has it been disrupted? The plan is to realise consistently lower inflation, for all the benefits this delivers for the long-term growth outlook (which are easily exaggerated). To achieve lower inflation, a helpfully stronger rand and stable oil price are essential.
Yet neither is influenced by South African interest rate settings. The supply side of our economy (the cost of imports) is not under our control. Only the demand side of the economy and its impact on prices can be managed to a degree through interest rate settings.
Policy-determined interest rates and the cost of credit have therefore been set high enough for an extended period to in effect restrain the demand side of the economy (to a fault, I would argue). A mixture of demand repression and welcome supply-side support — stable oil prices and a stronger rand with support from higher precious metal prices and a weaker dollar — helped bring down inflation in 2025.
This led us to an inflation target of 3%, and despite the severe monetary policy setting, there were some encouraging preliminary signs of a cyclical pick-up in credit and money supplies and in household consumption spending. By the end of 2025, household spending was ticking higher — by about 1.2% more than the quarter before — as were the growth rates in money and credit supplies.
Perhaps even more important for a sustained upswing, precious metal prices provided support for the rand, the Treasury, and the value of pension and retirement funds of working and retired South Africans.
The chance of a cyclical recovery has now receded sharply on the assumption that inflation will rise and the Reserve Bank will increase rather than cut interest rates over the next 12 months. The money market is now pricing in about 50 basis points higher short-term rates in 12 months. The broader bond market view is also anything but sanguine, with interest rates rising similarly, though still below those of a year ago.
The chance of a cyclical recovery has now receded sharply on the assumption that inflation will rise and the Reserve Bank will increase rather than cut interest rates over the next 12 months.
These are perhaps realistic expectations, but if they are imposed on a stagnant economy they will surely mean a serious and avoidable policy error. The rand, while helpfully little changed over 12 months, has unhelpfully also weakened marginally against the major currencies and other emerging markets.
It is not good sense to raise interest rates when a price shock is already damaging disposable incomes and undermining the willingness and ability of households or firms to spend. Adding higher interest rates to the debilitating impact of higher prices on spending (an oil price tax) just adds to the misery and can have no impact on inflation expectations.
Inflation and expected inflation will take their cue from the oil price and the rand, and judging by past performance neither the oil price nor the rand can be expected to continue in the same direction indefinitely. The rational expectation is that these trends must reverse and that inflation will reverse in the same direction.
It would be wise for monetary policy to stand aside and let it all work out. The broader plan should include ways to deal with the fallout from a supply-side shock that allows the economy to ride through a temporary increase in prices without raising interest rates.
There is something of a silver lining to the current circumstances. We are not dependent on imported oil or gas to generate electricity, as is Europe, for example. Domestic coal is the feedstock for our energy and also provides a domestic source of chemicals and refined petroleum.
Renewables will certainly play a more important role in the future, as will electric vehicles. We should have planned for a reserve of refining capacity but appear not to have done so.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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