Economics Weekly
By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano & Ame Muller
In an increasingly uncertain global economic environment, the public remarks of the Governor of the South African Reserve Bank (SARB), Lesetja Kganyago, carry heightened significance. In a recent lecture delivered at Rhodes University, Kganyago set out the Bank's evolving monetary policy thinking in response to the latest global inflation shock. The message was clear, South Africa has entered this period of external inflationary pressure from a relatively stronger footing, but the path ahead will depend on whether current price shocks remain temporary or become more persistent across the economy.
The key anchor is that inflation had reached the new 3% target prior to the shock, with a moderately restrictive policy stance already in place. This provided the SARB with an important buffer, avoiding the need for an immediate policy reaction when oil prices surged following the Middle East conflict and the disruption to the Strait of Hormuz.
However, the speech strongly pushes back against a simplistic "look-through" approach. While first-round effects from higher fuel prices are unavoidable and largely outside the control of monetary policy, the SARB is explicitly focused on preventing second-round effects, particularly through inflation expectations, wages, and broader price-setting behaviour. This is where policy credibility will be tested.
In his exact words, Kganyago, noted that "shocks have a habit of travelling in groups" and are therefore rarely isolated. He also highlighted the risk of overlapping shocks, with fuel already surging and food inflation emerging as a key upside risk, especially given fertiliser cost pressures and potential El Niño conditions. This raises the probability that inflation could become more persistent rather than self-correcting through statistical base effects and weaker demand. Importantly, the SARB does not see the current environment as warranting a pre-committed policy path. Instead, the emphasis is on maintaining flexibility. Financial conditions have already tightened endogenously, with market pricing shifting away from rate cuts and short-term yields rising, effectively doing some of the policy work without formal tightening.
That said, the starting point is not ideal. While real rates are positive and credibility has strengthened with subsequent target reviews, inflation expectations are not yet fully anchored at the desired 3% level. This creates asymmetry in the reaction function, leaving the SARB with limited tolerance for any signs of de-anchoring. The policy framework can therefore be summarised as follows:
From a forward-looking perspective, the SARB's scenario analysis reinforces a mild hawkish bias. While the baseline still allows for unchanged rates, both the intermediate and adverse scenarios require rate hikes, with all paths ultimately returning inflation to target. The reaction function is therefore circumstantial but clearly skewed toward defending credibility. Our latest view incorporates a single 25-basis point (bps) hike which could materialise at the next Monetary Policy Committee meeting later this month. This view reflects the upward revisions to our inflation forecast which is now expected to average 4.0% this year, 3.5% in 2027 before stabilising around 3.0% in 2028.
Week in review
The manufacturing PMI increased by 3.6 points to 52.6 in April, driven mainly by improvements in business activity and new sales orders. Business activity rose to 52.8 from 46.1, returning to expansionary territory, while new sales orders climbed to 52.9 from 44.5, supported by stronger domestic demand despite a decline in export sales. The employment index remained broadly unchanged, continuing to signal contraction. The inventories index increased to 52.3 from 48.8, suggesting stock-building ahead of anticipated price increases. Meanwhile, cost pressures intensified, with the purchasing price index rising to 85.6 from 75.8, reflecting elevated energy-linked input costs and a weaker exchange rate. Although the index tracking expected business conditions improved modestly, indicating less pessimism, the overall outlook remains subdued.
New vehicle sales volumes rose by 13.0% y/y in April to 47 979 units, following the 58 064 units sold in March. The increase was largely driven by new passenger sales which grew by 14.3% year-on-year (y/y) compared to 18.2% previously and reaching 34 414 units, although this was lower than the 39 373 units sold in the prior month. Commercial vehicle sales grew by 9.8% y/y compared with 15.5% previously, reaching 13 565 units. The sustained annual growth in vehicle sales reflected a combination of conducive financial conditions and resilient demand for entry-level and more affordable vehicle brands. However, this momentum is increasingly challenged by emerging macroeconomic headwinds, including higher energy prices, rising inflation expectations, and a shifting interest rate outlook linked to ongoing geopolitical tensions.
Electricity production declined by 7.1% y/y in March, following a 3.9% decline in February. On a seasonally-adjusted basis, generation decreased by 1.6% month-on-month (m/m), after a 0.5% m/m decline in February. Looking at the broader trend, electricity generation declined by 0.8% in the first quarter of 2026 compared to the previous quarter.
South Africa's gross foreign exchange reserves decreased to $77.1 billion in April, down from $77.8 billion in March. The decrease was largely driven by foreign exchange payments made on behalf of government, including the repayment of a foreign loan, partly offset by a foreign exchange loan received from the French Development Agency (AFD), a higher US dollar gold price, and valuation adjustments related to foreign exchange and asset price movements. The forward position was flat at $0.59 billion.
Week ahead
On Tuesday, the Quarterly Labour Force Survey (QLFS) for 1Q26 will be released. In 4Q25, QLFS data showed an increase of 44 085 quarter-on-quarter (q/q) in total employment, following an increase of 248 321 in the previous quarter. Compared to a year ago, employment improved by 21 066, bringing total employment to 17 098 908. The level of unemployment declined by 171 624 q/q (155 225 y/y), bringing the total number of unemployment individuals to 7 835 722. As a result, the official unemployment rate fell by 0.5-percentage points (ppts) to 31.4%.
Also on Tuesday, manufacturing production data for March will be released. Manufacturing output (not seasonally adjusted) declined by 2.8% y/y in February, following a 0.1% fall in January. Seasonally-adjusted production fell by 2.2% m/m, after increasing by 1.9% in January. Output declined by 2.0% in the three months ending in February compared to the previous three months.
On Thursday, mining production data for March will be released. Mining production (not seasonally adjusted) expanded strongly by 9.7% y/y in February, reflecting an acceleration from the 5.0% expansion in January. Seasonally-adjusted mining output accelerated by 2.3% m/m, following a 3.7% increase in January. Overall, mining output declined by 1.7% in the three months ending in February compared to the previous three months.
