By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) will announce its second interest rate decision for 2026 on Thursday, 26 March. While there was a split on whether they would cut interest rates or leave them unchanged at the January meeting because expected inflation provided ample space for continued easing, the market was less split on expectations of a cut in March. This was before the war that is currently raging through the Middle East. Since then, the degree of uncertainty around the inflation trajectory has risen, and a conservative MPC may not want to make further moves downward during these volatile times. We remain constructive on the South African (SA) economy's outlook, but we are confronting an inflation shock that is likely to reverberate across the entire economy and sustain shifts in expectations.
The latest Federal Reserve (Fed) meeting this week highlighted the caution with which policymakers are considering the impact of the war. While the decision to leave interest rates unchanged was expected, the committee lifted their inflation forecast marginally and noted that talks of a rate hike featured in the meeting but also emphasized the uncertain nature (scope and duration) in which the war will affect the economy. Despite this measured rhetoric by the Fed, the market's movements suggest that less favourable financial conditions are already unfolding, with the United States government's borrowing costs rising and rate cut expectations being pushed out by a year. This is happening in a country that is a net-exporter of energy and where consumers are seeing the price of petroleum products move without delay; SA is a different place though.
As a net-importer of petroleum products, SA is exposed to a material jump in fuel prices in April - of at least R5 per litre.1 Should these elevated oil prices be sustained, this would shift SA from a period of enjoying fuel price deflation that has helped contain overall inflation to one of renewed fuel-driven inflationary pressure. Importantly, our analysis is that SA needed persistent fuel price deflation, alongside slow food and core goods inflation, to compensate for higher administered price inflation. Without this, the SARB's room to continue cutting rates would be tight. This is going to provide important clues on the MPC's process of achieving their new target - where they believe the heavy-lifting will be done in the economy and how that may shift as shocks materialise.
Fortunately, the MPC provided a scenario on oil prices at the January meeting. In a scenario where oil prices lift (to $75 per barrel) and the rand weakens (to R18.50); inflation would peak at the top-end of the tolerance band (4%) and policy easing is delayed by one year. That said, the dynamism of inflation expectations is one of the pillars in the SARB's modelling. With expectations better anchored to the target and less backward-looking in their model, inflation shocks are more transitory as the generation of second- round effects is limited. In the 1Q26 survey results, the BER inflation expectations softened further towards target and while this is positive, 2Q26 expectations are likely to at least be influenced by higher energy costs. Should expectations quickly recover from this shock then the MPC would be in a more favourable position to look through this shock. Otherwise, we think monetary policy has all the reasons to be prudent and remain on hold, with some in the market already worried about a hike. However, these are volatile times, and expectations will continue shifting.
1 Fuel prices are regulated in SA and respond to market movements with a one-month lag.
Week in review
The BER Inflation Expectations Survey for 1Q26 shows a further improvement in inflation expectations, with average expectations across all time horizons edging down to a record low of 3.6%. Wage growth expectations are at around 4.7% for both 2026 and 2027, suggesting expected growth in real incomes. The growth outlook improved modestly, with respondents now expecting GDP growth of 1.5% in 2026 and a further acceleration in 2027.2
Headline inflation(GDP) fell to 3.0% y/y in February, from 3.5% in January, reaching the SARB's revised inflation target for the first time. Monthly pressure was 0.4%, mainly due to services inflation, while food and fuel deflation mitigated the pressure. Core inflation slowed to 3.0%, from 3.4% previously, with monthly pressure of 0.7%. Services inflation recorded 1.1% m/m, and 3.8% y/y, led by medical insurance. Core goods inflation was -0.2% m/m and 0.9% y/y. Average fuel prices fell by 3.1% m/m and were 10.1% lower than in February last year. Food and non-alcoholic beverages (NAB) inflation slowed to 3.7% y/y. Average prices were down 0.3% m/m, which mainly reflected meat deflation. We see headline inflation ticking up slightly in March, to around 3.1% y/y, with monthly pressure of 0.5%
Retail sales rose by 4.2% y/y in January, up from 2.5% in December. On a month-on- month basis, volume sales grew by 0.9%, reversing the 0.5% contraction in the previous month. The largest positive contributor was retailers in textiles, clothing, footwear and leather goods (9.9% y/y), likely supported by the back-to-school spending, followed by the “other” retailers category (10.3% y/y), reflecting the rising prominence of e-commerce. Overall, volumes increased by 1.3% in the three months ending in January compared to the previous three months, pointing to a solid start to 2026.
Week ahead
On Tuesday the FNB/BER Consumer Confidence Index (CCI) will be available for 1Q26. In 4Q25 the index rose to -9, up from -13 previously. The increase reflected an improved outlook on the economy and household finances as well as more willingness to purchase durable goods
On Thursday, the leading business cycle indicator for January will be published. In December, it decreased by 1.0% m/m to 117.2 points but still posted 3.9% y/y growth. The monthly fall was due to a decrease in five of the seven available component time series which outweighed increases in South Africa's US-dollar denominated export commodity price index and an increase in the trend growth rate of new passenger vehicles sold. The largest negative contributors were a decrease in the trend growth rate of real M1 money supply and in the amount of residential building plans approved.
2 The survey includes views from analysts, businesses, and trade unions.
Also on Thursday, producer inflation data for February will be released. In January, producer inflation slowed to 2.2% y/y, from 2.9% in December. On a monthly basis, producer prices declined by 0.2%, reflecting a fall in food and fuel prices. Food prices declined by 0.4% m/m, underscoring a 5.4% monthly drop in meat prices. We expect producer inflation to remain muted around the 2.0% handle in February, supported by a resilient rand and lower fuel prices.
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