Oil shock pushes inflation outlook higher as SARB expected to hold rates steady

South Africa’s inflation outlook has shifted materially in recent months as escalating geopolitical tensions in the Middle East continue to feed through into global oil prices, fuel costs and broader inflation dynamics.

According to Mzimasi Mabece, Head of Domestic Fixed Income at Melville Douglas, April 2026 inflation is expected to print close to 4.0% year-on-year, marking a notable increase from the approximately 3% levels recorded earlier this year.

“The recent escalation in the Iran-US/Israel conflict has introduced a significant external inflation shock through energy markets. Oil prices moving above $100 per barrel have had a direct impact on local fuel prices, with South Africa already experiencing two consecutive significant fuel price increases, says Mabece.”

The impact is beginning to filter through the economy, with early pass-through into transport and logistics costs already evident. Mabece says second-round effects are now increasingly important to monitor.

“The key concern for central banks is not only the initial fuel shock itself, but whether it becomes embedded more broadly through food prices, administered prices and wage negotiations,” adds Mabece.

While inflation expectations have drifted higher, Mabece notes that they remain broadly anchored and largely reflect the temporary impact of higher fuel costs rather than overheating domestic demand conditions.

“This is still primarily a supply-side shock. Importantly, inflation expectations have not meaningfully de-anchored and the South African Reserve Bank retains significant policy credibility,” he says.

The SARB has repeatedly highlighted geopolitical risks and oil prices as important upside risks to inflation, particularly as expectations remain above the Bank’s preferred 3% anchor.

Against this backdrop, Mabece expects the SARB to maintain interest rates at its upcoming Monetary Policy Committee meeting on 28 May 2026, while adopting a decisively hawkish tone.

“The policy environment has changed materially over recent months,” he says. “Markets have moved away from pricing aggressive rate cuts and central banks globally are increasingly adopting a hold-to-tightening bias in response to renewed inflation uncertainty.”

Mabece says the upcoming MPC meeting could also reveal greater divergence within the committee itself, including the possibility of a split vote as policymakers weigh inflation risks against weak household demand conditions.

Despite the near-term inflation pressures, Mabece believes the broader domestic macroeconomic backdrop remains more constructive than in previous inflation cycles.

“South Africa enters this period with some important structural improvements already underway, including a year of uninterrupted electricity supply, ongoing logistics and infrastructure reforms, and improved macroeconomic policy credibility,” says Mabece.

Rising fuel prices and inflation are however still expected to place additional pressure on consumers and household real incomes in the months ahead.

“Headline inflation is likely to temporarily move towards the upper end of the SARB’s 3% plus-minus-1 tolerance band, particularly during the second quarter of 2026. The critical issue for policymakers will be ensuring that temporary supply shocks do not evolve into sustained inflationary pressure through expectations and second-round effects”, concludes Mabece.”