Three weeks is a long time in financial markets.
When the South African Reserve Bank raised the policy rate by 25 basis points to 7% on 28 May, policymakers were looking at oil prices hovering around $100 a barrel, disruption in the Strait of Hormuz, and growing concern that another global inflation shock was taking hold.
Fast forward to today and the conversation has started to change.
Statistics South Africa reported on 17 June that consumer inflation accelerated to 4.5% in May, up from 4% in April and the highest annual reading since July 2024. At first glance, that appears to support the Reserve Bank’s decision to raise interest rates.
But the inflation data also tells another story.
The biggest driver of higher inflation was fuel. Since those prices were recorded, oil markets have shifted sharply, expectations for global supply have improved, and South African motorists are now likely to receive meaningful relief at the pumps in July.
This doesn’t mean the Reserve Bank suddenly has an easy decision ahead of its next Monetary Policy Committee (MPC) meeting on 23 July. It does, however, mean that some of the risks worrying policymakers three weeks ago are already looking different.
Fuel did most of the work
The headline inflation figure is only part of the story.
Transport costs were responsible for much of May’s increase after fuel prices rose another 14.3% during the month. That pushed annual fuel inflation to 28.7%, with petrol costing 24.8% more than a year ago and diesel prices up by 53.8%.
Now compare that with another figure in the Stats SA release.
Inflation excluding fuel remained unchanged at 3.7%, exactly where it was in April.
Put differently, fuel did most of the heavy lifting.
That’s worth bearing in mind because it suggests the increase in inflation wasn’t broad-based.
Food inflation, for example, continued to move in the opposite direction. The annual rate slowed to 1.9% in May from 2.9% in April. Fruit and nut prices were 8.5% lower than a year ago, vegetables were down 6.0%, and meat inflation eased from 9.4% to 7.3%.
None of that changes the fact that inflation has moved higher. But it does provide some context. Without the jump in fuel prices, May’s inflation picture would have looked considerably calmer.
The May numbers already belong to the past
There’s another point worth remembering.
Inflation data tells us what happened last month. Financial markets, on the other hand, react to what’s happening now.
Since May’s prices were collected, the outlook for global oil markets has changed quickly.
Markets rallied after United States President Donald Trump announced that an agreement aimed at ending the conflict with Iran would be signed in Geneva on Friday. Although the agreement still needs to hold, investors have interpreted it as increasing the chances that shipping through the Strait of Hormuz will gradually return to normal.
That matters because the Strait carries roughly a fifth of the world’s oil supply. Disruption there was one of the biggest reasons oil prices spiked in the first place.
As those fears have eased, so have oil prices.
From shortages to talk of oversupply
Only a few weeks ago, the focus was on whether the world would have enough oil if the Strait remained closed.
Now the conversation has shifted.
According to CNBC, Brent crude has fallen back below $80 a barrel after trading around the $100 level during the height of the crisis. At the same time, the International Energy Agency (IEA) has revised its outlook for the global oil market quite dramatically.
Instead of warning only about supply shortages, the Agency now expects weaker global demand this year as higher fuel prices weigh on consumers. Looking further ahead, it says production could recover strongly once exports from the Gulf return to normal, creating a sizeable oil surplus during 2027.
The IEA cautioned that this won’t happen overnight. Shipping routes still need to be fully re-opened, mines will have to be cleared from key waterways, and inventories remain under pressure after months of disruption.
Even so, the direction of travel has changed. Markets are no longer asking how much higher oil prices could go. Increasingly, they’re asking how quickly supply can recover.
South African motorists could soon benefit
The same shift is beginning to show up closer to home.
Early data from the Central Energy Fund suggests motorists could see sizeable fuel price cuts in July.
At first glance, that may seem surprising because National Treasury is due to reinstate the final portion of the temporary fuel levy relief introduced earlier this year.
The levy reduction was implemented to soften the impact of record fuel prices, lowering petrol by as much as R3 per litre and diesel by up to R3.93 per litre at its peak.
The remaining relief expires on 1 July, meaning the general fuel levy will return to its normal level.
Ordinarily, that would push fuel prices higher.
Instead, lower international oil prices and a relatively resilient rand appear to be offsetting the tax increase.
Current projections suggest petrol could still fall by just over R1 per litre, while diesel may decline by more than R2 per litre.
If those estimates hold, motorists will begin to see some relief from the same fuel-price shock that pushed inflation higher in May.
Why this matters for interest rates
To understand why these developments matter, it helps tor return to the Reserve Bank’s decision at the end of May.
At the time, the MPC wasn’t responding to a strong domestic economy. In fact, it had lowered its growth forecasts for the next two years, warning that higher global uncertainty and rising living costs would weigh on both household spending and investment.
The concern was inflation.
Oil prices had surged following the conflict in the Middle East, the Strait of Hormuz remained largely closed, and the Reserve Bank expected higher fuel costs to filter through to transport, food and, eventually, broader inflation.
That prompted the MPC to increase the repo rate by 25 basis points to 7%.
More telling, however, was the discussion around what could happen next.
Alongside its baseline forecast, the Reserve Bank published several risk scenarios. One looked at what would happen if the Strait of Hormuz remained closed for longer than expected. Another added the possibility of an El Niño weather pattern affecting local food production. A third combined several adverse developments.
In each case, inflation moved higher and economic growth slowed. Some of those scenarios also required further interest-rate increases to bring inflation back under control.
Those scenarios were not predictions. They were illustrations of how monetary policy might respond if risks became reality.
What the Governor has been saying
Governor Lesetja Kganyago expanded on that thinking in two speeches delivered after the MPC meeting.
His central message was that the Reserve Bank was not trying to offset higher oil prices directly. Interest rates cannot produce more oil or reopen shipping routes.
The bigger concern was what economists refer to as “second-round effects”.
In simple terms, the SARB was asking whether a temporary increase in fuel prices might become something more permanent. Would businesses pass higher transport costs on to consumers? Would workers demand higher wages to compensate for rising living costs? Would inflation expectations start drifting higher?
If that happened, inflation could become more entrenched, even after oil prices eventually came down.
That explains why Kganyago spent much of his Bureau for Economic Research address (delivered on 2 June) defending the decision to raise rates despite weak economic growth. He argued that central banks cannot prevent supply shocks, but they can act to stop those shocks from becoming embedded in inflation expectations.
The Governor returned to the same theme during the release of the Financial Stability Review on 10 June, describing the global environment as significantly more challenging than it had been only a few months earlier.
Three weeks later, some of those assumptions have changed
None of this means the Reserve Bank’s concerns were misplaced.
On the contrary, Wednesday’s inflation figures show that fuel prices did exactly what policymakers feared they would do.
What’s changed is that several of the assumptions underpinning the SARB’s assessment have already begun to shift.
Oil prices are no longer trading around $100 a barrel.
Markets are increasingly expecting the Strait of Hormuz to re-open.
The IEA is talking about a recovery in supply rather than prolonged shortages.
South African motorists could see fuel prices fall in July, even after the temporary fuel levy relief comes to an end.
Those developments won’t immediately reverse May’s inflation figures, nor do they guarantee that inflation will fall quickly over the coming months.
The Reserve Bank has made it clear that it will also be watching inflation expectations, wage settlements, food prices, and other evidence that higher fuel costs are spreading through the economy.
But if lower oil prices are sustained and fuel prices begin easing, one of the biggest sources of recent inflation pressure could become less severe than it appeared just a few weeks ago.
The next decision is unlikely to hinge on one number
That leaves the Reserve Bank with a more complicated picture than it faced in May.
Headline inflation has risen to 4.5%, largely because of fuel. At the same time, inflation excluding fuel remained unchanged, food inflation continued to ease, and the international factors that pushed oil prices sharply higher have started moving in a different direction.
The SARB has consistently said it does not pre-commit to future interest-rate decisions, preferring instead to assess new information as it becomes available.
That approach now appears particularly relevant.
Between the May MPC meeting and today, the global backdrop has shifted considerably. Whether those changes prove temporary or mark the beginning of a more sustained improvement is something policymakers will continue to assess over the coming weeks.
Attention will now turn to the next MPC meeting on 23 July.
By then, the Reserve Bank will have another month’s inflation data, greater clarity on fuel prices, a better sense of whether oil markets have stabilised, and more evidence on whether the inflation shock that dominated May is beginning to work its way out of the system.
