For most of this year grocery bills have been the one expense in which South African households caught some kind of break, with food inflation easing to its lowest level since 2010. Fuel costs — and now interest rates — are moving in the other direction.
Last week the Reserve Bank’s monetary policy committee (MPC) raised the repo rate by 25 basis points (bp) to 7.25%. The unanimous decision, which followed a hike in May and a pause in July, shows how hawkish the committee is now. The move came weeks after Stats SA reported that the economy shrank 0.2% in the second quarter — the first contraction after six consecutive quarters of growth.
“Recent increases in maize and wheat futures could see food inflation accelerate more sharply into next year,” Alexforbes macroeconomist Sifiso Mkhwanazi tells the FM. “This uptrend could coincide with, and be reinforced by, disruptions to agricultural markets arising from a strengthening El Niño weather phenomenon and the intensifying Russia-Ukraine conflict, which continues to affect wheat exports, among other commodities.”
Rising petrol and diesel prices forced the Bank’s hand. US and Israeli strikes on Iran at the end of February have turned into a drawn-out war, and Brent crude now trades more than 50% above last year’s $69 average. Cue another threat: El Niño, typically associated with floods in South America and severe drought in Australia and Southern Africa.
The Bank’s own forecasts show fuel inflation turning negative in the second quarter of 2027, just as food price gains accelerate to 5.6% in the third quarter from 1.4% now. Its model pencils in no further hikes, with cuts later as inflation falls back towards 3%. Danelee Masia — who runs Deutsche Bank in South Africa and heads its Central and Eastern Europe, Middle East and Africa economics team — told Bloomberg TV that last week’s move was the “insurance-type hike that one would expect when conditions start looking less favourable”.
Old Mutual head of economic research Keabetswe Mojapelo says households could face a combination of higher food costs and tighter monetary policy. “It will weaken spending, which has been a silver bullet for our growth for quite a while,” he says.
Stopping the shock
Household consumption accounts for nearly two-thirds of GDP, according to Investec chief economist Annabel Bishop, and it has held up better than the growth figures suggest. It rose 0.4% in the second quarter even as GDP fell, Stats SA data shows. Pay has not kept pace. The PayInc net salary index shows real take-home pay was 2.2% lower in July than a year earlier.
Credit has filled some of the gap. Total loans rose 6% year on year in the second quarter, according to the Eighty20/XDS Credit Stress Report cited by Bishop. That borrowing gave spending “some support”, she says, “but the rise is not sustainable”.
Masia sees trouble ahead: “You’re typically moving into a period where retailers tend to try to price up. And this is a difficult time, because consumers are not all … sitting on healthy balance sheets.”
Fuel will add to the strain. A petrol hike of R2.84/l and an increase close to R3 for diesel are signalled for October 7, which Bishop says would push inflation back towards 5%. The Bank expects fuel inflation to reach 40% in the fourth quarter, from 20% in August, and headline inflation to peak at 5.4%.
The Bank’s task is to stop the shock spreading. It will look through the first-round effect of higher fuel prices, “but not the risk that a prolonged global supply shock could become entrenched in domestic inflation”, says AG Capital market strategist Casey Sprake.
There are signs that it already is entrenched: services inflation edged up to 5.1% in August, Stats SA data shows, and Bank governor Lesetja Kganyago points to “price hikes well above the 3% inflation target in many other categories”.
South Africa is not alone. The European Central Bank and the Bank of Japan have raised rates, and so has the US Federal Reserve for the first time since 2023. Masia describes “almost a synchronised global tightening in policy rates” that creates “a different set of circumstances and risk for the Bank if [it ignores] it”.
The difference is that the US is booming. S&P Global’s purchasing managers’ index shows business activity in that country accelerating at its fastest pace in five years this month. The Atlanta Fed’s GDPNow tracker has the economy growing at an annualised 5.1% in the third quarter, the Financial Times reports. Futures markets now price in another 0.9 percentage points of Fed hikes over the next year.
Bond investors have taken fright at the prospect of inflation staying higher for longer. The US 10-year Treasury yield rose above 5.2% last week, its highest since 2007, and the 30-year yield topped 5.5% for the first time since 2004. Asked whether yields are high enough to “cool a red-hot economy”, Fidelity International fund manager Mike Riddell told the FT: “Economic data has answered that — we’re not even close.”
South Africa has been dragged along. The 10-year government bond yield rose above 9% earlier this month for the first time since May, Bloomberg reports. The yield on the R2030 bond closed at 8.23% on September 25, up from about 7.1% before the war began, Iress data shows.
It could have been worse. Kganyago said South Africa’s macroeconomic fundamentals, including the push for sustainable debt and permanently lower inflation, are “helping to protect us from the global bond selloff”.
A looming El Niño
Food is why the squeeze has not been worse. Inflation for food and nonalcoholic beverages was 1.1% in August. The Bank credits strong harvests and a levelling off in meat prices after the foot-and-mouth outbreak. But August’s rate was up from 0.9% in July, its first increase since November 2025, Stats SA data shows.
El Niño could end that run. On September 1 the South African Weather Service warned that it “could become the strongest event in living memory”. Kganyago is more measured: “We may start to see drought pressures from El Niño soon, but for now agricultural conditions are broadly favourable.”
Agricultural Business Chamber chief economist Wandile Sihlobo points to a record 17.4Mt maize crop. “Mid-September dam levels are at 90%, so we’ll go to next year with dam levels that are higher,” he says.
Masia is less relaxed. If an El Niño effect lands on top of higher fuel and fertiliser costs, “we might be sitting with materially higher inflation”, she says.
On the Bank’s forecasts, base effects take fuel inflation to −18.1% by the end of 2027. That is relief for commuters. For a household whose budget leans towards food, it arrives in the wrong column.
The government, at least, has some room. National Treasury director-general Duncan Pieterse told investors on September 14 that revenue collections are “running comfortably ahead of budget estimates despite the fuel levy relief”. Rate relief is further off. The Bank’s projected path implies about 90bp of cuts by the end of 2027, according to Anchor Capital economist Lerato Ntuli.
The bigger problem is growth. The MPC cut its 2026 forecast to 1.2% from 1.4%, barely above last year’s 1.1%. It sees 1.7% in 2027 and about 2% further out, provided global conditions settle and reforms deliver. World growth “is holding up”, Kganyago says, but “the global economy is not in a healthy space”.
Masia says the second-quarter contraction was driven by a spike in imports, partly for capital projects and partly to secure oil supplies. “It’s not clear to us that this weakness will be extended.” Deutsche Bank sees growth of only 1.3%–1.4% next year.
That is well short of the government’s ambition. “Our immediate objective is to lift economic growth above 3%,” President Cyril Ramaphosa said in August. Kganyago’s prescription: “Because of the adverse global environment, domestic reforms are our best growth option.”
For Mojapelo, the status quo can’t hold. “Resilience is not success,” he says. “The goal is growth.”
