Economics Weekly
By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole & Ame Muller
The balance of risks has shifted since the South African Reserve Bank's (SARB's) surprise decision to keep the repo rate unchanged at 7.00% at its July meeting. While domestic growth remains subdued, the external inflation environment has become more challenging. Oil prices have risen sharply amid renewed geopolitical tensions, while the United States (US) Federal Reserve (Fed) has resumed its tightening cycle.
The Fed raised its policy rate by 25-basis points (bps) to 3.75%-4.00% for the first time in three years on 16 September, with all 12 members of its rate-setting committee supporting the decision. The Fed also said most participants expect at least one more rate hike before year-end. The move reinforces the prospect of higher global interest rates for longer and could place additional pressure on emerging-market currencies and imported inflation.
For most emerging markets, including South Africa, the combination of higher oil prices and potentially tighter global financial conditions presents an upside risk to inflation, particularly through the currency and fuel prices. This makes it more difficult for the SARB to look through the current inflation shock, especially while inflation expectations remain above the new 3% objective.
But inflation expectations provide some comfort
The latest Bureau for Economic Research (BER) Survey of Inflation Expectations provides an important counterweight to these risks. The deterioration in professional inflation expectations recorded in 2Q26 have stabilised, and in 3Q26 expectations for 2026 remained at 4.4%, while five-year expectations eased from 4.1% to 4.0%. Expectations for 2027 and 2028 also declined to 4.0% and 3.8% from 4.1% and 3.9%, respectively.
The sharp decline in household inflation expectations is particularly encouraging, reversing much of the increase recorded in the second quarter. This suggests that the recent energy-price shock has not, so far, resulted in a further broad-based deterioration in inflation expectations.
However, professional expectations remain above the SARB's 3% objective. The latest survey results therefore signal a reduced risk of inflation expectations becoming progressively unanchored but does not yet provide sufficient evidence for the Monetary Policy Committee (MPC) to become comfortable with an easing bias.
Growth remains an important constraint
The decision also needs to be considered against a subdued domestic growth environment. Business and consumer confidence remain weak, while structural constraints and uncertainty continue to weigh on investment and economic activity. Higher interest rates would add pressure on interest-sensitive sectors as well as household and business finances.
This creates a difficult policy trade-off. However, with the SARB's inflation objective now centred on 3%, the threshold for tolerating persistent inflation pressures is lower than under the previous midpoint of the 3%-6% target range. The MPC is therefore likely to place greater emphasis on preventing temporary external shocks from becoming embedded in domestic inflation expectations and price-setting behaviour.
Our view
We expect the SARB to raise the repo rate by 25bps to 7.25% in September. The case for a hike has strengthened since July, particularly following the Fed's decision and the persistence of the oil-price shock. At the same time, moderating longer-term inflation expectations argues against viewing the move as the start of a renewed and prolonged tightening cycle.
Critically, for the MPC, the question is whether the improvement in inflation expectations is sufficient to offset the renewed external inflation risks. In our assessment, it is not yet sufficient to justify another pause. Therefore, a 25bps increase would further support the SARB's efforts to anchor inflation expectations around the new 3% objective, while remaining measured given weak domestic economic activity.
The outlook beyond September will remain data dependent. If oil prices and imported inflation pressures ease, and inflation expectations continue to moderate, the need for further rate increases would diminish. Conversely, a renewed deterioration in expectations or a more persistent oil-price shock could require a further policy response.
Week in review
Retail sales growth accelerated to 3.4% year-on-year (y/y) in July, up from 1.1% in June. On a month-on-month (m/m) seasonally-adjusted basis, sales volumes rose to 2.5%, a sharp rebound from -0.8% in June. The stronger retail performance was likely supported by easing living costs in July as petrol prices declined by around R2/litre, while food and non-alcoholic beverages inflation fell to a 16-year low of 0.9% y/y.
The FNB/BER Consumer Confidence Index (CCI) recovered partially to -13 in 3Q26 from -19, indicating that consumers are still generally pessimistic about economic conditions and their personal finances. The improvement in sentiment was driven by less negative expectations for the economy and household finances over the next year. However, consumers remain reluctant to make discretionary purchases, with appetite for spending on durable goods continuing to deteriorate amid elevated borrowing costs. While confidence improved across all income groups, higher-income households remain notably cautious due to fuel price pressures and higher interest rates. Overall, the survey suggests that household spending growth is likely to remain subdued in the coming months as consumers continue to prioritise essential spending over discretionary purchases.
Weekly Round-Up: Economics from Broader Africa
Broader African economic developments remained mixed over the past week, reflecting varying stages of growth, inflation and policy cycles across the region. While growth momentum remained robust in economies such as Ghana and infrastructure investment continued to support activity in Lesotho, inflation dynamics diverged markedly. Price pressures eased further in Mozambique and continued to moderate in Nigeria, strengthening the case for a more accommodative monetary policy stance. In contrast, Namibia and Eswatini recorded firmer inflation outcomes, largely reflecting higher transport and food-related costs. Elsewhere, Botswana's credit rating was affirmed despite ongoing challenges in the diamond sector, while Zambia signalled a renewed focus on translating macroeconomic stability into stronger economic growth, investment and job creation. Overall, the regional backdrop points to improving macroeconomic stability in several markets, although commodity market developments, fuel prices and economic diversification remain key themes shaping the outlook.
