The war in the Middle East is ‘coming home’ to South Africa, threatening the country’s inflationary targets and potentially forcing the Reserve Bank to upwardly adjust the interest rate.
This was the message from the central bank’s governor, Lesetja Kganyago, in his latest Monetary Policy Committee (MPC) statement issued yesterday.
He says since the last time the MPC gathered, the key event has been the outbreak of conflict in the Middle East.
“Prices for commodities like oil, gas and fertiliser have moved sharply higher.
“Meanwhile, there have been broad losses across equity, bond and currency markets, with only a few safe havens and energy producers showing gains. This repricing has been largely orderly, with few signs of financial-market dysfunction so far.”
With the conflict coming up for four weeks on Saturday, Kganyago said the die was not yet cast but it was not looking good as trading conditions were looking increasingly precarious.
“At this stage, it is obvious that global inflation will be higher in the near term, while growth will probably suffer from supply-chain disruptions and rising costs. But the longer-term outlook is less clear.
“In these circumstances, leading central banks have generally kept rates unchanged as they wait for more information. Markets have largely dropped expectations for rate cuts in major economies, and probabilities of rate hikes have risen.”
These sentiments have already been expressed by the likes of Dawie Roodt, chief economist of the Efficient Group, and Gavin Kelly, CEO of the Road Freight Association.
Both have warned that repercussions from the Middle East upheaval will reverberate across markets, eventually affecting the buying power of the man on the street.
Should the interest rate increase, it will signal the end of the lowest rate cycles seen in 20 years.
Back in 2023, consumer price index inflation peaked above 7%, broadly declined through 2024-2026, and by February, during Finance Minister Enoch Godongwana’s Budget Speech presentation to Parliament, had stayed around 3%.
This two-decade inflation low was driven largely by easing food, fuel and transport pressures, staying within the Bank’s targets of 3% or less.
But it increasingly looks like robust economic growth is going to bend the knee to the Middle East conflict.
Kganyago says: “The latest data show the economy grew further in the fourth quarter of 2025, with output rising by 1.1% for the year as a whole. This is better than recent years but still well below longer-run averages. We have been encouraged by green shoots such as rising confidence and stronger investment, but the ongoing war could interrupt the growth recovery.
“For the time being, our growth projections are largely unchanged. There have been data revisions, which lowered 2025 growth, making 2026 look a bit stronger in comparison. This offsets some of the impact from the current shock. We still have growth rising to around 2% over the next few years, but we now see downside risks to the outlook.
“Inflation was 3.0% for February, with core inflation also at 3.0%. This is precisely in line with our target,” Kganyago said.
But higher energy prices would raise inflation in the near term, he said.
“We expect headline earnings will soon accelerate to around 4%, with fuel inflation over 18% for the second quarter. Our baseline forecast then has a gradual unwinding of the shock, taking inflation back to 3% late next year.
“The ongoing Middle East conflict is a clear instance of a supply shock, which raises prices while weakening demand.
“The standard response to a supply shock is to look through first-round effects, which are unavoidable and cannot be stopped by interest rate changes. At the same time, central banks should be alert to second-round effects, where an initial shock triggers broad price increases.
“Getting policy right means ensuring that the price response to supply shocks is transitory and not persistent,” Kganyago said.
