- South Africa Flags Upside Inflation Risks as Markets Swing from Rate Cuts to Hikes
South Africa’s central bank is warning that inflation risks are shifting upward again, as the Middle East conflict feeds through to the energy outlook and prompts markets to rethink the country’s interest-rate path.
The South African Reserve Bank now sees the balance of risk to inflation as tilted to the upside, with markets pricing in two rate hikes this year rather than the cuts expected before the conflict began.
In its latest Monetary Policy Review, the central bank said the Iran war presents “material upside risks” to South Africa’s inflation path. It still expects inflation to remain within its tolerance band of one percentage point above the 3% target, but it said headline inflation is likely to be higher in the near term and average 3.7% in 2026 before easing back to the target by late 2027.
The main concern is oil. We can report that in the bank’s severe scenario, crude stays above $97 a barrel for the year, pushing inflation sharply higher and preventing the target from being reached within the forecast period. The central bank said uncertainty over the duration of the conflict, the extent of infrastructure damage, and the scale of second-round effects all skew risks upward.
That marks a clear change in market thinking. A Financial analyst said market-implied interest-rate expectations now point to about two 25-basis-point hikes this year. That is a sharp reversal from the outlook just before the conflict, when investors had been expecting two cuts in 2026.
Even so, the central bank’s message is not one of panic. It argued that South Africa is in a stronger position than it was during the 2022 energy shock, helped by a lower inflation target and ongoing fiscal consolidation that has reduced the country’s risk premium. Reuters also noted that the bank has kept its key rate at 6.75% at every meeting this year, after last cutting by 25 basis points in November 2025.
From a market perspective, the story is no longer just about inflation being low today. South Africa’s most recent inflation reading was 3% in February, but that was before the latest Middle East shock fully entered the picture. The more profound issue now is whether external energy pressures begin to undo the progress already made on disinflation.
That is what makes the SARB’s stance important. It is effectively saying that the inflation battle has become more uncertain again. If oil remains elevated and the conflict persists, rate expectations may continue to harden. If the shock fades more quickly, the central bank could still keep inflation near target without needing to tighten aggressively.
