South Africa’s inflation expectations are offering policymakers some breathing room, but a sell-off in the bond market and renewed pressure on the rand are complicating the picture ahead of next week’s interest rate decision.
The latest survey by the Stellenbosch-based Bureau for Economic Research (BER) shows average inflation expectations among analysts, businesspeople and trade union officials holding steady or easing. It follows a second-quarter jump, when the energy price shock linked to the US-Iran conflict pushed expectations higher. Businesses, however, raised some of their longer-term forecasts.
On average, the three groups expect inflation of 4.4% this year, unchanged from the previous survey. Their forecast for 2027 fell to 4% from 4.2%, while five-year expectations eased to 4% from 4.1%.
Households pulled back further. Their 12-month expectations fell to 4.9% from 6% — the lowest in nearly five years and more than reversing the second-quarter increase — while five-year expectations dropped to 8.3% from 9.1%. The BER says the decline was broad-based.
Oil prices have climbed further since the survey closed. The South African Reserve Bank (SARB) must now decide how much weight to place on improving expectations when the monetary policy committee (MPC) announces its decision on September 23.
“The third-quarter survey on inflation expectations was quite encouraging,” says Johann Els, chief economist at PSG Financial Services.
Longer-term expectations remain above their first-quarter levels. At 4%, the professional groups’ average five-year forecast is still higher than the record low of 3.6% recorded in the first quarter. Els notes that many had expected the latest figures to be higher.
Keabetswe Mojapelo, head of economic research at Old Mutual, also sees encouragement in the numbers, noting that expectations are declining, including among households. “But the survey itself is less reassuring than the headline number,” he says.
He points out that union officials drove most of the drop in the two-year forecast, while business expectations increased.
Union officials’ expectations for this year were unchanged at 4.3%. For 2027, they fell to 4.1% from 4.4%, and for 2028 to 3.9% from 4.4%. Their five-year outlook dropped to 4.3% from 4.7%.
Businesspeople raised their forecast for 2028 to 4.2% from 4%, and their five-year expectations to 4.2% from 4.1%. Their forecasts for this year and next were unchanged.
The survey of the three professional groups ran from August 17 to September 3 — before the latest attacks on Saudi energy infrastructure. Mojapelo notes that it predates a meaningful deterioration in the oil price outlook.
Els argues that the decline among unions matters because of its influence on wage demands.
“Trade union officials are a fairly important group when we think about wage demands and the impact of wage growth on inflation, and that’s important for the SARB to watch closely,” he says.
Union officials expect wages to rise 4.9% this year and next. Across the three professional groups, however, the average wage forecast for this year rose to 5% from 4.8%, while next year’s stayed at 4.8%.
Bonds feel the heat
The US Federal Reserve announces its interest rate decision on September 16. Els expects it to hold and believes its decision will have little bearing on the SARB.
“Even if the Fed hikes, I still think the SARB will keep rates unchanged,” he says.
James Turp, a fixed income portfolio manager at Ninety One, takes a different view of the US outlook. He believes recent inflation and employment data point to higher Fed rates.
He attributes the recent sell-off in South African government bonds to a weaker rand, higher oil prices, and the escalation in the US-Iran conflict. He warns that continued pressure on global bond yields could put local bonds under further strain.
Brent crude futures traded near $107 a barrel early on September 15 after attacks put Saudi Arabia’s East-West pipeline out of action, according to Reuters. Policymakers must weigh an improvement in inflation expectations against another disruption to oil supplies.
Even so, Turp believes the survey gives the SARB’s doves a stronger case for holding rates next week.
“If you’re a dove on the MPC and you’re looking for reasons not to hike rates, this certainly helps you,” he says.
One of the scenarios SARB governor Lesetja Kganyago outlined at the July meeting examined what would happen if inflation expectations kept rising. It showed extra pressure on wages and underlying inflation, requiring tighter monetary policy.
“So, this is supportive,” says Turp.
Hike or hold
Mojapelo cautions that expectations remain above the SARB’s 3% inflation target, which has a tolerance band of one percentage point on either side. He believes the survey offers some comfort but should not be read as room to keep rates unchanged, given the rise in business expectations and the oil shock that followed.
Turp expects a 25 basis point (bp) hike next week, with a four–two split on the committee. That would reverse July’s voting pattern, when four members favoured leaving the policy rate at 7% and two wanted a 25bp increase.
Els expects the SARB to hold. His reasoning is that it moved early with a hike in May, while many other central banks have yet to move.
“That early rate hike limits the need for further rate increases, especially against the backdrop of these lower inflation expectations in the third quarter,” he says.
Els acknowledges the risk from persistently high oil prices but argues that the inflation pressure is likely to be temporary. He expects oil prices to fall eventually, helping inflation ease. The decline in expectations is central to his case for a hold.
