Inflation expectations spike derails rate cut hopes in Africa’s largest economy

South Africa’s prospects of cutting interest rates have dimmed after households, businesses, and economists raised their inflation expectations in the wake of the United States-Iran conflict, strengthening the case for another policy rate hike this month.

A second-quarter survey by the Bureau for Economic Research (BER) showed inflation expectations rose across all major respondent groups as the Middle East conflict disrupted global energy markets, pushing up fuel prices and clouding the country’s inflation outlook. In May, annual inflation in Africa’s biggest economy rose for the third month to 4.5 percent, marking the steepest since July 2024, though below the expected 4.7 percent.

The survey found that professional forecasters—including analysts, business executives and trade union officials—now expect inflation to average 4.4 percent this year, up from 3.6 percent in the first quarter and well above the South African Reserve Bank’s (SARB) preferred three percent target.

The results reinforce expectations that the central bank could tighten monetary policy again when its Monetary Policy Committee meets in July 23. In May, the SARB raised its benchmark repo rate for the first time since 2023 to seven percent, citing worsening inflation risks.

Long-term inflation expectations also deteriorated. The BER said professional groups lifted their five-year inflation forecast to 4.1 percent from 3.6 percent in the previous survey.

Households have also become more pessimistic. One-year inflation expectations climbed to 6 percent from 5.4 percent, while five-year expectations increased to 9.1 percent from 8.4 percent.

Despite anticipating faster price increases, respondents expect only marginal wage growth. Wage expectations edged up to 4.8 percent for both this year and next, suggesting many South Africans expect real incomes to remain under pressure.

“Against this backdrop of higher energy prices during the survey period, all three professional groups revised their inflation expectations higher across the forecast horizon,” the BER said.

The worsening inflation outlook has also dampened confidence in the economy.

Professional respondents cut their economic growth forecast for 2026 to 1.2 percent from 1.5 percent in the previous quarter, while expecting a modest recovery to 1.5 percent in 2027.

That is below Enoch Godongwana, the country’s finance minister’s February forecast of 1.6 percent growth this year. The International Monetary Fund has also lowered South Africa’s growth projection to one percent from 1.4 percent, citing the economic fallout from the Middle East conflict.

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According to the BER, the survey was conducted during heightened geopolitical tensions after the United States launched military strikes on Iran, prompting Tehran to close the Strait of Hormuz, one of the world’s most important oil shipping routes, disrupting global fuel supplies.

Although the Strait has since reopened under an interim peace agreement, the United Nations Conference on Trade and Development has warned that vulnerable economies remain exposed to prolonged increases in food and energy costs.

The survey also revealed growing concerns in financial markets.

Respondents no longer expect commercial lending rates to decline this year, forecasting the prime lending rate will end of the year at 10.5 percent, 50 basis points higher than anticipated in the previous quarter.

Government bond yields are also expected to remain elevated as investors demand higher compensation for geopolitical risks. Analysts raised their forecast for South Africa’s 10-year government bond yield to 8.52 percent and 8.17 percent in 2027.

 

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Among professional groups, analysts remained the most optimistic that inflation would eventually return towards the SARB’s target, forecasting inflation of 3.5 percent by 2028. Business executives and trade unions were more cautious, expecting inflation to remain at 4.0 percent and 4.4 percent, respectively.