Adam Furlan, Portfolio Manager at Ninety One
South Africa’s inflation story has taken a turn. After months of steady decline, supported by a firmer rand and the disinflationary tailwind imported from global markets, consumer price inflation has risen to 4% year-on-year in April, up from 3.1% in March. Core inflation has nudged higher too, from 3.2% to 3.6%. The numbers are not alarming on their own, but they arrive at an awkward moment for the South African Reserve Bank, and in my view, they leave the SARB with a genuine conundrum.
The Reserve Bank only recently shifted its inflation target to 3%, a move reaffirmed by National Treasury in the final quarter of last year. Until recently, the trajectory was cooperating. Now, a supply shock, principally in energy, has flipped the script, and the risk of food inflation building later in the year is sharpening the question of how the central bank should respond.
The intuitive view is that supply shocks are exogenous events: they sit outside the SARB’s control, they fade, and raising rates will not change the price of petrol at the pump. Why act at all? That is not, in our view, how the Governor and his team are thinking about the problem.
You don’t wait to see second-round effects coming through from a supply-side shock. You act early, and acting early means that, in the long run, you have to hike less, and you have a smaller impact on the economy. That has been the consistent message from Lesetja Kganyago’s recent public appearances, and it is a discipline the SARB applied in 2022. With the benefit of hindsight, we believe that approach proved correct.
On that basis, our expectation is that the SARB will hike by 25 basis points at the May Monetary Policy Committee (MPC) meeting on Thursday, with the possibility of one or two further hikes in the cycle if the impact of the war broadens. The aim is not to wrestle a single inflation print into submission, but to anchor expectations before the supply shock seeps into wage settlements, pricing decisions, and the broader behavioural fabric of the economy.
That is where the real risk sits. Inflation at 4% is uncomfortable but not catastrophic; it remains below the midpoint of the old 3% to 6% target band (and within the new 2 – 4% tolerance), even if that band no longer defines the SARB’s mandate. The bigger concern, in our view, is what happens to inflation expectations. The May meeting will be held without the benefit of an updated expectations survey, but the next release will be closely scrutinised. If expectations drift upward, it would signal that second-round effects are taking hold, and that is the point at which the central bank’s tolerance narrows quickly.
Markets, for their part, have already moved. A 25-basis-point hike in May has been priced in for some time, and recent volatility has, if anything, added to that conviction. A sharp reversal in oil prices, perhaps triggered by an easing of geopolitical tensions and a reopening of the Strait of Hormuz, could change the calculation. South African rates can react quickly to good news as well as bad. But we are cautious about how much hiking the market is now pricing in.
Our base case is for average inflation of 4.5% in 2026, declining through 2027, with a peak above 5% in the fourth quarter of this year. Against that profile, more than a full percentage point of hikes would push real rates into restrictive territory, arguably further than the inflation outlook warrants if oil prices correct and the trajectory turns over as expected.
For portfolio positioning, the implications are practical. Our analysis flagged the upside inflation risks early, particularly on food, ahead of the energy supply shock. That early warning translated into a deliberate underweight to shorter-dated bonds in the Ninety One Diversified Income Fund, which are most sensitive to the kind of rate-hike repricing now playing out. Switching into inflation-linked bonds out of nominals also benefited the fund.
The April CPI print was in line with our expectations and did not prompt a fresh shift, but our cautious stance on duration, especially at the front end of the curve, remains in place. The situation remains fluid, and much like the Reserve Bank, we remain data-dependent and stand ready to act on opportunities that arise in the market during this volatile period.
The broader message, for us, is one familiar to anyone who has watched the SARB navigate previous cycles. Central banks earn their credibility in moments like this, when the temptation is to look through a shock and the discipline is to act before the damage compounds. That is precisely why we believe the front end of the curve still warrants caution, and why early action, however unwelcome in the short term, tends to be the lower-cost path over time.
Adriaan Pask, Chief Investment Officer at PSG Wealth
April inflation accelerated to 4.0%, underscoring the difficult trade-off facing policymakers: protect a fragile consumer and weak economy, or move early to prevent inflation expectations from becoming entrenched.
South Africa’s inflation debate has become materially more complicated in the wake of the April consumer price index print. Headline inflation rose to 4.0% year on year in April, up from 3.1% in March, driven largely by a sharp increase in fuel prices and the knock-on effects that higher transport and input costs can have across the economy. For households already under pressure and for an economy still struggling to generate meaningful growth, that is unwelcome news. But for the South African Reserve Bank (SARB), it also sharpens an uncomfortable policy dilemma.
On the one hand, the latest inflation move is clearly being influenced by supply-side pressures rather than a booming domestic economy. South Africa is not facing an overheating demand cycle. Growth remains subdued, consumer balance sheets are stretched, and the broader economy is still highly sensitive to any further erosion in disposable income. Under those conditions, higher interest rates risk adding pressure to exactly the segment that has been carrying much of the economy: the consumer.
In theory, raising interest rates is a straightforward response to higher inflation because it curbs demand. By increasing the cost of credit, policymakers reduce spending in the economy and help contain price pressures. But when inflation is being pushed higher by fuel, electricity, logistics and other administered or imported costs, rate hikes do not solve the root problem. They can dampen demand, but they cannot directly lower oil prices or remove structural bottlenecks in the domestic economy.
Yet that does not mean the SARB can simply look through the April print. The Reserve Bank has been clear in recent years that it wants inflation outcomes anchored closer to 3%, not merely drifting somewhere within the old 3% to 6% range. If policymakers appear indifferent to a renewed acceleration in inflation, they risk a more damaging outcome. Higher inflation expectations becoming embedded in wage demands, price-setting behaviour and investor sentiment. Once that happens, the cost of restoring credibility becomes much higher.
This is why the case for tighter policy, however reluctant, cannot be dismissed. If inflation risks are left unanswered early, the danger is that medium- to longer-term inflation starts to settle at a higher level. For a central bank, that is a far greater threat than the discomfort of taking a cautious tightening step in the near term. It is also not only a domestic issue. Monetary credibility matters for the currency, for capital flows and for the confidence foreign investors place in South Africa’s policy framework.
That said, the growth trade-off is real. Consumer spending remains a critical engine of South African GDP, and households are already contending with elevated debt-servicing costs, higher administered prices and weak income growth. Any additional tightening would place more strain on mortgage holders, vehicle finance customers and businesses dependent on discretionary spending. Retailers and other interest-rate-sensitive sectors are likely to remain vulnerable if borrowing costs stay higher for longer.
This is also why interest rate policy cannot be the only answer. South Africa’s inflation challenge is increasingly shaped by supply-side realities: energy costs, fuel prices, logistics constraints and other structural inefficiencies that raise the cost of doing business. These pressures require a different policy response. Lowering input costs through energy reform, improving logistics efficiency, reducing regulatory friction and supporting a more competitive operating environment would do more to ease inflation sustainably than relying on the interest-rate tool alone.
There have been encouraging signs that policymakers recognise this. Measures to cushion fuel-price pressure, the gradual opening of the electricity market, and attempts to improve logistics performance all point to a better understanding of where inflationary pressure is originating. But reforms work with a lag, and markets will want to see consistency, continuity and execution before they assign meaningful confidence to the growth outlook.
For investors, that means remaining disciplined rather than reactive. In a potentially higher-rate environment, caution around additional leverage is prudent, and portfolio positioning should favour quality, resilience and diversification. Some fixed-income segments may face pressure if inflation expectations rise, while cash and money-market instruments may become more attractive. Within equities, selectivity matters: businesses with stronger earnings persistence and lower sensitivity to borrowing costs are likely to be better placed than those reliant on a stretched consumer.
Ultimately, the SARB is being asked to manage a problem that monetary policy can only partly solve. But if inflation is allowed to drift higher without a credible response, the long-term consequences for the economy could be more severe than the short-term pain of restraint. That is why, despite the fragility of the recovery, the Reserve Bank may still have to lean against inflation now. The more durable solution, however, lies in reforms that reduce supply-side costs, improve productivity and give South Africa a stronger, more sustainable growth platform.
ENDS
