By By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano & Ame Muller
The war-driven supply-side shock that initially pushed energy costs up is now lifting consumer inflation and worsening the near-term outlook. In April, headline inflation accelerated to 4.0% from 3.1% in March, driven mainly by the immediate effects of higher transport costs. More important, however, is the likely spillover into a wider range of goods and services. Some market expectations for 2026 have been revised from around 3% at the start of this year to north of 4% currently. This reflects sticky oil prices, rising distribution costs that are likely to shape retail pricing, and the risk that future planting seasons could be disrupted by shortages of key inputs and adverse weather conditions. At the March Monetary Policy Committee (MPC) meeting, forecasts had not yet fully captured the breadth of the conflict. The May meeting this week should therefore provide a clearer indication of how the South African Reserve Bank (SARB) assesses second-round effects and the risk of persistently higher inflation expectations. In our view, the question is less whether policy needs to tighten and more how quickly the tightening will proceed.
Slowly does it
This shock hit South Africa's economy at a time when underlying conditions had improved. Structural reforms were advancing, sentiment was recovering, financial conditions remained supportive despite restrictive monetary policy, the rand was stronger, and inflation had moved to the new 3% target alongside a more credible process for anchoring inflation expectations. Furthermore, underlying inflation dynamics reflected normalising services inflation which was mitigated by goods inflation that was benefitting from cheaper imports. Without this stronger starting point, the impact of the war would likely have been more severe.
The foundations for a more productive economy therefore remain in place, supporting the longer-term outlook. The challenge is that the recent deterioration in near-term conditions has arrived before the new target and broader reforms have been fully internalised, which risks slowing recent gains. As a result, the MPC may choose to use interest rates to reinforce its commitment to the new objective without materially tightening financial conditions. A gradual response would be more consistent with an economy that remains sluggish and is already facing higher market borrowing costs. In addition, margin pressure and weaker real incomes across many industries are likely to weigh on spending and investment. Private sector credit extension data already points to a pullback in corporate lending. Pressure on businesses and households is also increasing the need for stronger cost containment, which should limit passthrough. This may give the MPC room to proceed cautiously while it monitors how business behaviour and inflation expectations evolve.
A decisive response needs no repetition
A useful comparison is the Russia-Ukraine conflict, the most recent supply shock that also drove oil prices sharply higher. The main difference is that the current conflict threatens farming inputs rather than immediate food supply. Therefore, the earlier shock pushed up both energy and food prices quickly. Even so, the MPC's response to that episode offers guidance on how the central bank may react in a riskier global environment. Because that war erupted well before the March meeting, the MPC had more time to assess the situation and responded with a 25-basis point (bps) hike. As the conflict persisted, subsequent increases became more aggressive, with hikes of 50bps in May and 75bps from July.
The broader lesson is that hopes for a quick resolution to geopolitical shocks are often misplaced. Even when markets gradually adjust and risk premia begins to normalise, the initial inflation impulse still requires a policy response. Fiscal policy can offer targeted tax relief, but monetary policy must prevent inflation from becoming embedded. The MPC has made it clear that it will not wait for second-round effects to appear, or for wage and price expectations to drift away from target, before acting. At the same time, it may try to improve its response compared to the previous episode by relying less on incremental hikes, ending the cycle earlier, and allowing activity to recover sooner.
Overall, a rate hike appears imminent. The pace of tightening will depend on how quickly the MPC believes second-round effects could emerge, whether it sees scope to improve on its response to previous shocks, and how it now weighs the value of its credibility and policy signalling following the successful target adjustments of 2017-2020 and again in 2025.
Week in review
Headline inflation rose to 4.0% year-on-year (y/y) in April from 3.1% in March. Monthly pressure was 1.1%, mainly due to pressures from fuel and core inflation, with further marginal pressure from food. Core inflation lifted to 3.6%, with monthly pressure of 0.5%. Services inflation recorded 0.6% month-on-month (m/m) and 4.6% y/y, mainly driven by medical insurance, communication and public transport. Core goods inflation was 0.3% m/m and 1.4% y/y. Average fuel prices increased by 18.2% m/m and were 11.4% higher than in April 2025. Food and NAB inflation slowed to 2.9% y/y with average prices rising by 0.7% m/m mainly driven by vegetables, meat as well as dairy and eggs. Headline inflation should accelerate further in May; we predict 4.8%.
Retail sales growth increased to 2.6% y/y in March, up from 1.6% in February. On a month-on-month basis, sales volumes edged up by 0.1%, recovering from a 1.1% decline in the previous month. As a result, volume sales for 1Q26 were flat, suggesting that the retail sector made no meaningful contribution to GDP growth in the quarter. Importantly, this data largely predates the sharp fuel price increases linked to escalated tensions in the Middle East, which are likely to dampen sentiment and weigh on consumer activity going forward.
Week ahead
On Tuesday, the leading business cycle indicator for March will be published. In February, it rose by 0.5% m/m to 120.2, which reflects 6.4% annual growth versus 5.3% previously. The monthly rise was due to an increase in seven of the ten available components, which outweighed declines in the other three components. The largest positive contributors were increases in South Africa's US-dollar denominated export commodity price index and the number of residential building plans approved. In contrast, the largest negative contributors were a decrease in the trend growth rate in job advertisements and a decrease in the volume of domestic orders received in the manufacturing sector.
On Thursday, producer inflation data for April will be released. In March, producer inflation rose to 2.3% y/y, from 1.8% in February. On a monthly basis, producer prices rose by 1.1%. The main contributors to annual PPI inflation were food products, beverages and tobacco as well as coke, petroleum, chemical, rubber and plastic products.
Also on Thursday, data on Private Sector Credit Extension (PSCE) for April will be released. In March, PSCE growth slowed to 8.5% y/y from 10.5% previously. Corporate credit remained the main driver at 11.8% y/y, supported by strong growth in general loans and advances (14.0%) and credit card advances (9.9%). Household credit growth increased to 4.5% y/y, with leasing finance rising to 15.7% and vehicle finance edging up to 9.8%.
Lastly on Thursday, the trade balance for April will be published. The trade balance surplus narrowed to R31.9 billion in March, down from R35.9 billion in February, as import growth outpaced exports. Exports increased by 12.1% m/m, driven by mineral and chemical products, while imports rose by a sharper 18.4% m/m, supported by vehicle and transport equipment, original equipment components, and chemical products.
Weekly Round-Up: Economics from Broader Africa
