Image: iStock South Africa’s inflation battle has entered a more dangerous phase, with the South African Reserve Bank (Sarb) making it clear that it will not budge from its 3% target – even as a fresh global oil shock threatens to push prices higher and squeeze already strained households.
“We have learned our lesson from the previous shock of 2002 where the target was lowered, and when the shock came, we decided to go back to the old target. It was a costly macroeconomic lesson,” said Sarb governor Lesetja Kganyago.
“This time round, the inflation target is 3% and it remains 3%. We have experienced this shock and we have got to remain focused on realising our 3% objective. Doing so will make us more resilient against difficult global conditions and stand us in good stead.”
This resolve comes as the Sarb’s latest Monetary Policy Review warns that “the escalating conflict in the Middle East and rising oil prices have renewed upward pressure on global inflation” and raised the risk of a reversal of disinflation.
The bank notes that whereas inflation had eased to its 3% target in February, it is now expected to rise in the near term as the oil shock feeds through the economy. The outlook, it says, now carries “the peril of stagflation”.
Markets have already taken note. Earlier this year, interest rate cuts were expected, but the Sarb acknowledges that “markets are now anticipating policy rate increases”, reflecting the sharp deterioration in the inflation outlook.
The Monetary Policy Review document, published on Tuesday, 21 April, states: “Amid heightened risks to inflation, market-implied interest rate expectations now suggest scope for about two 25-basis-point interest rate hikes this year. This contrasts with two cuts in 2026 that were anticipated just before the conflict began.”
A squeeze on everything
Independent economist John Loos argues that focusing on the repo rate alone risks missing the broader and more damaging forces at play.
“Indirect inflation impacts on the ability to repay debt… petrol prices have jumped and if there is another increase in the fuel price, that will have a broader impact on homeowners’ ability to repay bonds as transport costs start to squeeze and there are increased pressures on income.”
Loos has pencilled in at least one 25-basis-point rate hike this year, but believes the real risk lies in the persistence of the global oil shock rather than the pace of monetary tightening.
More worrying still, he notes that markets may be underestimating the scale of the disruption.
“There are analysts saying that the oil market is underpricing and underestimating the extent of the supply disruptions, which suggests that at some future point you may have upward pressure on oil when the full extent is appreciated.”
This would mean further upward pressure on inflation, and potentially a more aggressive response from the Sarb.
The hidden affordability crisis
Even before the latest oil shock, South African households were grappling with a deepening affordability crisis, one that Loos argues has been misunderstood.
His latest research shows that though house prices have risen faster than incomes over the long term, lower interest rates mean that, for credit-dependent buyers, mortgage affordability is not dramatically worse than it was decades ago.
But this narrow measure hides a far more troubling reality. “What has changed… lies partly in certain direct home operating cost-related increases, largely related to public sector-provided services,” Loos writes, pointing to steep increases in electricity tariffs, municipal rates and other utilities.
These costs have risen above general inflation and income growth, eroding household finances in ways that interest rate movements alone cannot capture. The result is a slow but relentless squeeze: even if bond repayments remain manageable, the broader cost of living continues to climb.
Oil shock hits the system
The latest Middle East conflict has poured fuel on this fire. Investec economist Annabel Bishop says oil markets have already reacted violently. “Oil prices posted their largest-ever monthly gain in March in the wake of the most severe oil supply shock in history… as refiners anxiously scrambled to replace locked-in Middle Eastern cargoes.”
There may be some easing as supply routes reopen, but uncertainty remains high. “Energy price drops are also being limited by uncertainty… Infrastructure has been damaged and supply routes are still impeded,” she notes.
For South Africa, the implications are immediate. The country is in line for further fuel price increases, which are “crucial for that month’s inflation figures and interest rate decision”.
Bishop expects inflation to average about 3.6% this year, largely driven by higher fuel costs and second-round effects.
Efficient Group chief economist Dawie Roodt is even more direct about the risks ahead. “South Africa could be heading for a sharp rise in inflation as fuel prices climb, with diesel potentially increasing by around R10 per litre and petrol by about R6,” he warns.
He expects inflation to jump sharply in the short term, potentially reaching 4.5% or even 5% and remaining elevated for longer than many anticipate.
That kind of trajectory would almost certainly force the Sarb to act, even if growth remains weak.
Households at breaking point
While economists debate rate paths and inflation forecasts, the reality on the ground is already stark. Debt Rescue says the latest surge in fuel and electricity costs is pushing households into crisis territory.
“Nine out of 10 respondents… report they are under serious financial strain,” it says, with more than half facing severe pressure and unsure how they will cope.
“This signals a critical tipping point in the country’s cost-of-living crisis that has driven millions of people to their knees,” says CEO Neil Roets.
It’s not limited to discretionary spending. Increasingly, households are cutting back on essentials. “A whopping 87% of people… said they will definitely be cutting back on essential food items and other basic necessities,” Roets notes.
Fuel costs are central to this dynamic, feeding into food prices, transport costs and the broader economy. “Another sharp increase in the fuel price will push inflation up even more, resulting in a significant slowdown in economic growth and higher debt-servicing costs,” he warns.
The risk is a vicious cycle: rising costs force households to cut spending, weakening demand, slowing growth and increasing unemployment, which in turn deepens the financial strain.
A fragile balancing act
For the Sarb the challenge is to navigate this environment without losing credibility. It insists inflation will return to target by late 2027, but acknowledges that the near-term outlook has deteriorated sharply.
Kganyago’s message is clear: the 3% target is not negotiable, even in the face of external shocks.
The logic is rooted in hard experience. Allowing inflation expectations to drift, even temporarily, risks embedding higher inflation and forcing more painful policy adjustments later.
But the cost of this discipline is increasingly being felt by households. Interest rates may rise modestly, but the real squeeze is already coming from elsewhere: petrol pumps, electricity bills, food prices and transport costs.
South Africa is facing a layered affordability crisis, one in which global shocks amplify domestic weaknesses and the cost of living rises even when headline inflation appears contained.
The Sarb can anchor inflation expectations and manage interest rates. But it cannot pump petrol, lower electricity tariffs or rebuild supply chains in the Middle East.
And for millions of South Africans, those are the pressures that matter most. DM
Neesa Moodley is Business Maverick associate editor.
This story first appeared in our weekly DM168 newspaper, available countrywide for R35.
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