South Africa's chances of lowering interest rates have faded after households, businesses, and economists all lifted their inflation expectations following the United States-Iran conflict and its impact on global energy markets. This shift has strengthened arguments for another rate increase when policymakers meet later this month.
A second-quarter survey by the Bureau for Economic Research found inflation expectations climbed across all major respondent groups as Middle East tensions disrupted oil supplies and sent fuel prices higher. In May, annual inflation in the continent's largest economy climbed to 4.5 percent, the third consecutive monthly rise and the steepest since July 2024, though it fell short of forecasts predicting 4.7 percent.
Professional forecasters now expect inflation to average 4.4 percent this year, up sharply from 3.6 percent in the first quarter and well above the South African Reserve Bank's preferred three percent target. The bank raised its benchmark repo rate to seven percent in May—its first increase since 2023—citing rising inflation risks.
Long-term inflation expectations also deteriorated significantly. Professional groups lifted their five-year inflation forecast to 4.1 percent from 3.6 percent previously, while households grew more pessimistic about prices ahead.
One-year inflation expectations jumped to six percent from 5.4 percent, and five-year expectations climbed to 9.1 percent from 8.4 percent.
Despite bracing for faster price increases, respondents expect only modest wage growth. The bureau said wage expectations edged up to 4.8 percent for both this year and next, meaning many South Africans anticipate their real incomes will face continued pressure.
"All three professional groups revised their inflation expectations higher across the forecast horizon," the BER stated, citing the higher energy prices during the survey period.
The deteriorating inflation outlook has also dented economic confidence across the board. Professional respondents cut their 2026 growth forecast to 1.2 percent from 1.5 percent, while expecting only a modest recovery to 1.5 percent in 2027.
This undershoots finance minister Enoch Godongwana's February forecast of 1.6 percent growth this year.
The International Monetary Fund has similarly lowered South Africa's growth projection to one percent from 1.4 percent, pointing to economic fallout from Middle East tensions. The survey was conducted when geopolitical tensions peaked following U.S. military strikes on Iran and Tehran's closure of the Strait of Hormuz, a critical global oil shipping route.
Although the strait has since reopened under an interim peace agreement, the United Nations Conference on Trade and Development warned that vulnerable economies face prolonged exposure to rising food and energy costs. Financial markets have also shown growing anxiety, with respondents no longer expecting commercial lending rates to fall this year and forecasting the prime lending rate will end at 10.5 percent.
