By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) kept the policy rate unchanged at 6.75% at its March meeting, as expected amid the recent war in the Middle East. Unfortunately, the news flow around the war remains discouraging. While talks of a ceasefire have intermittently led to some oil price retreat, the language around the war remains concerningly escalatory and should sustain volatility. The MPC's messaging highlights the uncertain operating environment, but the central bank is resolute on its inflation objective and could raise rates if the supply shock does not abate.
The latest MPC forecast shows inflation rising to 4.0% in 2Q26 and moving relatively sideways until 1Q27. Thereafter, inflation slows towards the 3% target - seemingly settling there by the end of 2028. A deeper look into the underlying dynamics reveals that the over $10 per barrel lift in oil prices, and a depreciating rand, produces a strong direct impact on fuel, which is nearly 9-percentage points (ppts) higher than the January meeting forecast. While food inflation is initially lower, given a softer starting point, pressure starts to build in the latter part of this year and into 2027 - likely reflecting higher freight costs. The SARB's forecasts also point to modest upward pressure on core inflation, reflecting other second-round effects such as public transport costs. However, the expected core inflation average over the forecast period does not suggest panic that higher cost-push inflation will have a sustained impact on underlying price dynamics. As explained in our previous publication, the SARB's Quarterly Projection Model (QPM) regards inflation expectations as more forward-looking and cognisant of the inflation target. This limits the extent and duration of passthrough to core inflation following such shocks. This is also supported by delayed monetary policy easing. Even with this update, inflation risks are tilted upwards.
Interestingly, the growth outlook remains unchanged as the lower 2025 base creates room for stronger growth this year and mitigates the impact of the shock. That said, the MPC noted downside risk to growth as this shock is likely to weaken demand. Weaker demand should stem from lower confidence and softer disposable income - especially as the previously anticipated interest rate cuts are delayed.
Once again, the MPC provided alternative higher-inflation scenarios, which include prolonged conflict with further adverse impacts on oil prices and the rand. Both scenarios suggest interest rate hikes and lower growth. This is a reminder that the consequences of this conflict are expected to accrue the longer it progresses. For an economy that was expected to perform better in 2026, this is disheartening. Furthermore, we are yet to fully comprehend the impact over the longer term should investment decisions become less optimal. While we hope that this will not become a greater storm that derails our optimism, this decision to keep interest rates unchanged is firmly in line with a central bank committed to its mandate.
Week in review
The FNB/BER Consumer Confidence Index (CCI) improved to -7 in 1Q26, from -9 previously, driven mainly by a strong rebound in sentiment among high-income households. Better household financial expectations and a more positive economic outlook supported overall confidence, helped by factors such as lower interest rates, stronger asset prices, a firmer rand and, partially supportive fiscal measures announced in the 2026 Budget in February. This improvement suggests that consumer spending momentum remained intact at the start of the year, particularly among more affluent consumers who account for a large share of discretionary spending. Nevertheless, the outlook has since become more uncertain due to heightened geopolitical risks following the escalation of conflict in the Middle East.
The leading business cycle indicator rose by 0.4% m/m to 118.2 in January, which reflects 4.8% annual growth versus 4.3% previously. The monthly rise was due to an increase in five of the ten available components, which outweighed the other five components. The largest positive contributors were an increase in South Africa's US- dollar denominated export commodity price index and an improvement in the RMB/ BER Business Confidence Index. In contrast, the largest negative contributors were a decrease in the new passenger vehicles sales trend growth rate and a decrease in the volume of domestic orders received in the manufacturing sector.
Producer inflation slowed to 1.8% y/y for February, from 2.2% in January. There was no monthly pressure. Upward pressure on annual PPI inflation came mainly from food products, beverages and tobacco (0.2% m/m), as well as furniture and other manufacturing (0.5% m/m).
Week ahead
On Monday, data on Private Sector Credit Extension (PSCE) for February will be released. In January, PSCE growth edged slightly higher to 8.8% y/y, from 8.7% previously. Corporate credit remained strong at 12.9% y/y, driven mainly by general loans (15.6% y/y), while household credit growth continued to recover, rising to 4.0% y/y. Within households, vehicle finance accelerated to 8.9% y/y and mortgage growth edged up to 2.8% y/y.
On Tuesday, the trade balance for February will be published. The trade balance recorded a narrower surplus in January of R9.3 billion versus a downwardly revised R22.4 billion in the prior month. The January outcome reflected a sharp decline in exports, due to weaker machinery, vehicle and chemical shipments, while imports increased due to stronger purchases of base metals and transport equipment.
Also on Tuesday, the Quarterly Employment Statistics (QES) for 4Q25 will be published. In 3Q25, the QES showed that 29 000 (0.3% q/q) formal jobs were created. However, employment was down by 0.7% y/y (-79 000), with mostly full-time jobs lost. Job creation remains concentrated in public services and mining, while manufacturing and construction continue to shed jobs, and earnings growth is still largely driven by service-sector activity despite subdued hiring conditions. Gross earnings were up 3.2% y/y, still highlighting a faster recovery than employment.
On Wednesday, manufacturing PMI data for March will be released. The manufacturing PMI (seasonally adjusted) fell to 47.4 in February. Business activity fell back into contraction, while employment weakened further and weighed on the headline index. New sales were flat, exports improved but remained weak, while confidence in future business conditions strengthened, pointing to optimism despite current pressures. Manufacturing conditions remain constrained by port delays, electricity disruptions and weak demand
Also on Wednesday, new vehicle sales data for March will be released. New vehicle sales volumes rose strongly to 53 445 units in February, driven mainly by higher commercial vehicle demand, while passenger car sales also improved. Annual growth of 11.4% reflects an ongoing replacement cycle, stable inflation, recent interest-rate cuts, and resilient demand for more affordable vehicles.
On Thursday, data for the electricity production for February will be released. Electricity production remained weak in January, with output still lower than a year ago by 6.2%. However, electricity production rebounded on a month-on-month basis, by 1.5%, offsetting December's decline, but the near-term trend continued to point to a contraction.
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