Iran war, looming El Niño herald misery for Sarb's inflation target

The benign February consumer price inflation (CPI) data released by Statistics South Africa (Stats SA) on Wednesday now seem like ancient history.

The Iran war launched by the US and Israel at the end of February will have a muted impact on the March read, but a shocker of note is bubbling in the pipeline for April and beyond.

With the prospects rising for a return of the El Niño weather pattern, a perfect storm is brewing to blow the South African Reserve Bank’s (Sarb’s) inflation target out of reach.

The poor in South Africa and the wider region will bear the brunt of this unfolding catastrophe while the inflationary headwinds will slow economic growth, raise borrowing costs and impede the government’s already limited capacity to help those most in need.

The most immediate concern is surging oil prices and a softening rand – a double whammy as crude oil is priced in greenbacks. The International Energy Agency (IEA) has described the ongoing conflict in the Middle East and the choking of the Strait of Hormuz as the biggest disruption to oil supplies in history.

The volatility of both the rand and oil prices has left economists and the Central Energy Fund scrambling to calculate the size of the looming hike in the pump price for petrol and diesel in April.

As things currently stand, the stars are lining up for a R4.27/litre hike for petrol – which would take it to close to R24.50/litre – and an above R7/litre spike in retail diesel prices to a record of more than R26.

Investec chief economist Annabel Bishop said this “would add around 1.0% y/y to South Africa’s inflation rate in that month ...” and probably take the consumer price index (CPI) beyond the Reserve Bank’s new 2% to 4% target range.

This has obliterated hopes for a rate cut when the Sarb’s Monetary Policy Committee (MPC) makes its next scheduled rate announcement on 26 March. Indeed, a pre-emptive hike cannot be ruled out, as the Sarb crafts monetary policy with a view to the future.

The prospect of rising rates will be an additional obstacle to economic growth, potentially putting paid to Treasury’s projection of 1.6% for 2026. This would undermine its target for debt stabilisation at a peak of 78.9% of gross domestic product (GDP).

“If Brent crude oil prices average $140 per barrel for two months, global growth would fall 0.4 percentage points below our March baseline while Africa’s heavyweight economies, including Ghana, South Africa and Kenya, see growth lower by 0.3 percentage points,” Brendon Verster, senior economist at Oxford Economics Africa, said in a commentary on Wednesday.

That leaves little scope for measures to ease the coming pain, such as adjustments to the fuel levy, a significant increase in Sassa grants or VAT relief.

This is a consequence of decades of State Capture, mismanagement and the siphoning and squandering of state funds as economic growth slowed: there is almost no leeway left to respond to a crisis with fiscal tools, because the toolbox is bare.

“The fuel levy is seen by Treasury as general income into the fiscus – and it is a rather large one,” notes Gavin Kelly, CEO of the Road Freight Association.

“At the onset of the Ukraine war in 2022, there was hot debate about reviewing the Basic Fuel Price methodology, which had the (then) DMRE and Treasury announcing a temporary R1.50 reduction in the general fuel levy. More importantly, there was a proposal for reviewing the Regulatory Accounting System (RAC). To the best … knowledge of the Association, the RAC was not reviewed, and perhaps it is time to review this,” he said in comments sent to Daily Maverick.

Worst-case scenario: History repeats itself

Like Russia’s invasion of Ukraine – which was followed by a strong El Niño that decimated staple crops in this region – history could repeat itself in a chilling manner.

Aside from being a key route for a fifth of the world’s oil supplies, the Strait of Hormuz is also a critical transport link for fertiliser inputs.

“Around one-third of global seaborne fertiliser trade (about 16 million tonnes) passes through the Strait, raising concerns about fertiliser access for some of the poorest countries,” the UN’s trade arm Unctad recently warned.

Russia’s invasion of Ukraine sent global food prices soaring because it disrupted grain supplies while sending fuel costs through the roof. The current conflict has triggered the latter while choking the shipment of critical fertilisers.

To top it off, the US Climate Prediction Centre said in its latest update that there was a 62% chance that El Niño would emerge between June and August and persist until the end of 2026.

Typically heralding drought in southern Africa, the last such event in 2023/24 scorched the maize crop across the region, fuelling inflation and causing food shortages of a staple that poor households rely on.

Not all doom and gloom

For the record, the February data showed that CPI slowed to 3.0% on an annual basis – exactly where the Sarb wants it – from 3.5% in January. Food inflation promisingly slowed to 3.7% from 4.0%.

Before the missiles started flying around the Middle East, that would have been seen as vindication of the Sarb’s efforts to anchor inflation at 3.0%, paving the way for a possible rate cut next week. That scenario has now gone up in smoke.

A prolonged Middle East conflict followed by an intense El Niño is plausible, but is the worst-case scenario. Others could play out with less of a bite.

A quick end to the conflict – not least because of its impact on US consumers and public opinion – could dramatically change this foreboding economic landscape, and El Niño’s return in a muscular form is not set in stone.

This setback in the battle to contain inflation could be temporary, and next season could see another stout maize harvest. At least the foundations are there, and perhaps the February inflation read should not be consigned to history’s dustbin.

The 2025/26 South African grain harvest, including for maize, has been abundant and is estimated to be only 3% less than last season’s – the second largest on record. That is in large part thanks to the rains of La Niña.

“We expect South Africa’s consumer food price inflation to slow in 2026, but the fuel price remains a major upside risk,” said Wandile Sihlobo, chief economist at the Agricultural Business Chamber.

That may strike some as a sunny view and one that could be dimmed by the swirling clouds of conflict and El Niño. In the Age of Trump, who knows what crisis will next erupt?

However, a number of scenarios are possible. There is no doubt that April will bring price shocks, and they won’t abate quickly. The nagging questions are how long the shocks will last and where the next one will come from. DM