South Africa’s inflation outlook is becoming increasingly challenging due to higher oil prices, persistent services inflation and emerging food price pressures.
The South African Reserve Bank’s (Sarb) Monetary Policy Committee (MPC) raised the repo rate by 25-basis-points (bps) to 7.25% at its September meeting, its second increase this year, in a unanimous decision that signalled a stronger focus on protecting the credibility of the Bank’s 3% inflation target. The question is whether rates have peaked?
Dr Lerato Ntuli, economist at Anchor Capital, said the August inflation data had come in marginally softer than expected, with headline inflation at 4.4% and core inflation at 4.1%, both 0.1 percentage points below consensus.
However, she said the broader inflation outlook had become more difficult, particularly as higher oil prices and emerging food price risks threatened to put renewed pressure on consumers.
“The decision signals that the MPC is prioritising the credibility of its new 3% inflation target, even as the domestic growth outlook remains weak,” Ntuli said.
The latest increase has moved monetary policy into a modestly restrictive setting. Headline inflation rose from 4.3% in July, while core inflation eased from 4.2%.
While headline inflation remains relatively contained, it is still above the upper end of the SARB’s 2% to 4% tolerance band and materially above its 3% target.
Ntuli said the composition of inflation remained important, with subdued goods and food inflation providing some relief, while services, housing and transport costs remained comparatively elevated.
Services inflation increased to 5.1% in August from 5.0% in July. Ntuli said this was particularly important because services inflation can influence wages and inflation expectations.
Food and non alcoholic beverages inflation remained relatively low at 1.1%, helping to contain overall inflation. However, there were early indications that food disinflation could be fading, with food and non alcoholic beverage prices rising by 0.1% month on month in August after declining by 0.2% in July.
Oil remains the key inflation risk
The SARB has significantly raised its assumptions around oil prices, reflecting the impact of the global energy shock.
The Bank now expects Brent crude to average $90 a barrel in 2026, up from its previous assumption of $82, while its 2027 assumption has increased from $75 to $80 a barrel.
Ntuli said the path of oil prices would be critical to the inflation outlook.
Brent crude had fallen below $100 a barrel on 22 September briefly, after reaching $108 on 15 September. The decline reflected some easing of the geopolitical risk premium as signals emerged that the US Iran conflict could move towards a negotiated settlement.
However, with oil prices still above $100 a barrel, Ntuli said the SARB’s assumption of $80 a barrel for 2027 depended on geopolitical tensions easing.
"Should negotiations stall or tensions intensify, oil could become a significant upside risk to inflation. The impact of higher oil prices could also extend beyond fuel. Higher transport and energy costs can feed into the prices of goods and services, while increased fuel and fertiliser costs could eventually place pressure on food prices," Ntuli said.
Inflation forecast raised
The SARB has raised its 2026 headline inflation forecast to 4.4%, from 4.0%, while its 2027 forecast has increased to 4.0% from 3.8%.
Its 2028 forecast has also been revised higher to 3.2% from 3.1%.
The near term outlook is considerably more challenging. The Bank now expects headline inflation to reach 5.4% in the fourth quarter of 2026, compared with its previous forecast of 4.3%, before remaining at 5.3% in the first quarter of 2027.
Inflation is then expected to ease as the fuel shock passes through the economy, reaching 3.9% by the second quarter of 2027 and 3.1% by the fourth quarter.
Ntuli said the SARB’s restrictive monetary policy stance was intended to prevent temporary price shocks from becoming entrenched through second round effects.
Inflation expectations provide some relief, although they remain above the Bank’s 3% target.
The Bureau for Economic Research’s third quarter survey showed five-year inflation expectations easing to 4.0% from 4.1%, while trade union expectations also improved.
However, the survey was conducted before the latest fuel price increases and the expected substantial October adjustment.
“The fourth quarter survey, due before the November meeting, will be an important test,” Ntuli said.
Growth remains weak
The inflation challenge comes as South Africa’s economy continues to struggle for momentum.
The SARB has lowered its 2026 GDP growth forecast to 1.2% from 1.4%, after the economy contracted by 0.2% in the second quarter.
Despite the weak growth outlook, the Bank has indicated that price stability remains a priority.
Ntuli said the combination of record fuel prices, sticky core inflation, rising food inflation risks, rand vulnerability and a more hawkish US Federal Reserve was likely to delay the resumption of monetary easing.
The September rate increase also restored the interest rate differential between South Africa and the US to about 3.25 percentage points, helping to preserve the rand’s carry advantage.
However, Ntuli said the risks remained skewed towards rand weakness.
A further increase in US interest rates could compress the interest rate differential, increasing the risk of renewed rand depreciation and adding to imported inflation.
Rate cuts may still be on the horizon
Despite the more restrictive stance, the SARB’s own projections point towards eventual easing as inflation returns towards the 3% target.
The Bank’s quarterly projection model indicates a policy rate averaging 6.34% in the fourth quarter of 2027 and 5.98% in the fourth quarter of 2028.
This would imply roughly 90 basis points of rate cuts from current levels by the end of 2027 and about 125 basis points by the end of 2028.
Ntuli expects the SARB to leave rates unchanged at its November meeting.
However, she said the outlook could change if inflation accelerates more sharply than expected.
“A further rate hike would become more likely if October CPI exceeds 5%, core accelerates, or the rand weakens sharply on a further Fed hike,” Ntuli said.
Conversely, a durable settlement between the US and Iran that results in a sustained decline in oil prices could bring the first rate cut forward.
For now, however, the combination of external inflation pressures and weak domestic growth leaves the SARB facing a difficult balancing act.
The latest decision suggests that the Bank is prepared to accept some pressure on economic activity in the short term to ensure that the current inflation shock does not become embedded in the economy.
For South African consumers and businesses, that means the prospect of lower interest rates may be pushed further into the future, even as economic growth remains subdued.
ashley.lechman@nationalmg.co.za