By By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano & Ame Muller
The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) raised the policy rate by a measured 25 -basis points (bps) at its May meeting, while underscoring its strong commitment to preserving credibility and steering headline inflation back to 3% within its two-year implementation horizon. Despite two members voting to keep rates unchanged, the distinctly hawkish tone of the statement, and the MPC's consideration of a 50bps hike, suggests that larger moves remain possible. This risk would rise further should surveyed inflation expectations increase materially. For now, economic growth is likely to remain subdued as higher inflation and nominal interest rates continue to squeeze disposable incomes. Even so, when assessed in real terms, the current policy stance is less restrictive than it was at the start of the year.
External conditions remain precarious
The SARB raised its oil price forecast by around $10 per barrel over the forecast horizon adding to the over $10 upward adjustment to the 2026 forecast at the previous meeting, which is the main driver of its more bullish inflation outlook. Consistent with the Bank's research, the scale of this revision points to a stronger pickup in fuel inflation and some second-round effects feeding through into food and core inflation (headline inflation excluding energy and food). Encouragingly, the rand has remained resilient, reflecting the gains from structural reforms and improved demand for South African assets. However, with the war ongoing and the Strait of Hormuz effectively closed, inflation risks are becoming more visible and could place further pressure on the currency, particularly if supply disruptions and rising costs weigh on activity and heighten socio-political risks.
Inflation is a sticky issue
The SARB has also revised its inflation forecasts sharply over the past two meetings. Following the 0.4-percentage point (ppt) upgrade to the 2026 forecast and 0.1ppt to the 2027 forecast at the March meeting, the latest round reflects a further 0.7ppt increase in 2026 and 0.4ppt increase in 2027. While this partly points to persistent services inflation, most of the revision is consistent with a higher fuel inflation outlook. Initial second-round effects are also emerging, particularly in transport services. That said, the MPC statement placed considerable emphasis on the risk of broader second-round pressures as input costs and wage demands rise. Consistent with this, the SARB has also revised unit labour costs higher. A notable aspect of the MPC's messaging is that, although more frequent adjustments in market-based forecasts may have informed this proactive but measured hike, the Committee appears keen to draw further guidance from the 2Q26 inflation expectations survey ahead of the July meeting. Our assessment is that market expectations are typically more conservative and more closely aligned with the inflation-targeting framework than those of businesses, unions and households, which tend to reflect more idiosyncratic cost pressures. As a result, a more bullish outlook among price-setters would carry increasingly important implications for the unit labour cost outlook. If the survey were to show a material rise in expectations and a persistent deviation from target over the longer term, the MPC's next move could be more aggressive, in line with its hawkish communication. The SARB continues to view inflation risks as tilted to the upside, and its scenario analysis suggests that compounding adverse shocks, such as unfavourable weather conditions, could keep inflation sticky and increase the likelihood of even higher nominal interest rates.
Weaker activity and subdued confidence tend to leave scars on the economy
Ultimately, while this is primarily an inflation shock, the effects on sentiment, profitability, and demand could still be significant. The SARB has downgraded its growth forecasts by 0.2ppts in both 2026 and 2027, to 1.2% and 1.7%, respectively. This relatively modest adjustment is consistent with the real policy rate being less restrictive in a higher-inflation environment. Even so, the slightly wider output gap over the forecast horizon points to some risk of economic scarring. Over time, this slack, together with favourable base effects, should help contain inflation. Although growth risks remain tilted to the downside, the outer forecast still reflects the benefits of an improving operating environment, which should continue to support financial conditions.
Overall, we interpret the statement as hawkish. While real interest rates may point to a somewhat less restrictive monetary policy stance, the economic costs of the ongoing war are mounting and could prompt a more forceful response from an MPC intent on preserving credibility and maintaining an effective inflation-targeting framework. Over time, South Africa should become less vulnerable to similar shocks, but for now, a swift resolution to the current conflict would be highly beneficial.
Week in review
The leading business cycle indicator rose by 2.4% m/m to 123.0 in March, which reflects 7.5% annual growth versus 6.3% previously. The monthly rise was due to an increase in six of the seven available components, which outweighed the decrease in the composite leading business cycle indicator for South Africa's major trading-partner countries. The largest positive contributors were an increase in the trend growth rate in the real M1 money supply and the widening of the interest rate spread.
Producer inflation rose by 4.8% year-on-year (y/y) in April, up from 2.3% in March. On a monthly basis, producer prices increased by 3.0% following a 1.1% increase previously. Coke, petroleum, chemical, rubber and plastic products were the biggest contributors to headline inflation, while notable increases also emerged in categories such as food products, beverages and tobacco and paper and printed products.
Week ahead
On Monday, the manufacturing PMI for May will be released. The manufacturing PMI (seasonally adjusted) increased to 52.6 in April. Business activity returned to expansionary territory, while new sales orders rose, supported by stronger domestic demand despite a decline in export sales. The employment index remained broadly unchanged, continuing to signal a contraction. Inventory levels moved into expansion territory, suggesting firms are building stock in anticipation of higher prices. At the same time, cost pressures intensified, driven by higher energy-related input costs and a weaker exchange rate. Although the index tracking expected business conditions improved modestly, indicating less pessimism, the overall outlook remains subdued.
Also on Wednesday, new vehicle sales data for May will be released. New vehicle sales volumes rose by 13.0% y/y in April to 47 979 units, driven mainly by higher passenger car sales which grew by 14.3% y/y, while commercial vehicle sales also recorded solid gains and grew by 9.8% y/y. The overall resilience reflects supportive financial conditions and steady demand for more affordable vehicles. However, this momentum is facing rising risks from macroeconomic pressures, including higher energy costs, increasing inflation expectations, and a shifting interest rate outlook linked to geopolitical developments.
On Thursday, the RMB/BER Confidence Index (BCI) for 2Q26 will be published. In 1Q26, the BCI rose to 47 index points, up from 44 previously. While confidence improved modestly, the index remains below the neutral 50-point mark. Sentiment strengthened among building contractors and new vehicle dealers, supported by interest rate cuts and resilient demand in more budget-friendly segments. By contrast, retail and manufacturing confidence declined. Composite indicators suggest that the economy is moving out of contractionary territory, although the recovery remains fragile.
Also, on Thursday, data on electricity production for April will be released. Electricity production remained weak in March, with output still lower than a year ago by 7.1%. On a seasonally adjusted basis, electricity production declined by 1.6% month-on-month (m/m). Looking at the broader trend, electricity generation declined by 0.8% in the first quarter of 2026.
On Friday, data on SA's gross foreign exchange reserves for May will be published. Gross foreign exchange 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. This was partly offset by a foreign exchange loan received from the French Development Agency (AFD), a higher United States dollar gold price, and valuation adjustments related to foreign exchange and asset price movements.
Weekly Round-Up: Economics from Broader Africa
