By Arthur Kamp, Chief Economist at Sanlam Investments

A few weeks back, the future path for South Africa’s repo rate seemed clear. Disinflation had driven the annual advance in headline CPI towards the Reserve Bank’s new inflation target of 3% with a tolerance band of 1%. Indeed, the inflation print for February 2028 was exactly 3.0%.

Further, the Reserve Bank’s inflation forecast, which accompanied its January 2026 Monetary Policy Committee (MPC) Statement, showed inflation anchored at close to the target level over the medium term, averaging 3.3% in 2026 and 3.2% in 2027.

Consistent with this backdrop the Bank’s Quarterly Projection Model reflected a decrease in the repo rate from its current level of 6.75% to 6.31% at end 2026 and 6.05% at end 2027 – a level approaching the Bank’s estimate for the neutral rate of 5.5%.

The nascent oil price shock, however, challenges this favourable outlook. The key variable to monitor is inflation expectations. The announcement of the new, lower inflation target, in the 2025 Medium Term Budget Policy Statement, was accompanied by a material downward adjustment in average inflation expectations. Prior to the announcement, two years ahead average inflation expectations, published by the Bureau for Economic Research (BER) at Stellenbosch University, decreased to 4.2% in 3Q25 from the recent peak of 5.6% in 4Q23. Following the announcement of the new target in November 2025, average expectations decreased materially further to 3.6% in 1Q26.

The SARB is likely to remain on hold this week while it assesses the magnitude and likely duration of the oil price shock and its expected impact on inflation. After all, a common argument is that higher interest rates cannot increase oil supply.

If the conflict is resolved soon, it is likely that the expected near-term jump in inflation should prove temporary. Interest rate cuts would likely only be delayed.

However, if oil prices remain high relative to the pre-war level for an extended period, the expected near-term lift in inflation would be extended and inflation expectations would likely drift higher, especially if high oil prices translate into higher food prices. Fuel is extensively used in agriculture processes and fertilizer costs are increasing.

This is a significant risk. Whereas average two-years ahead inflation expectations were 3.6% in 1Q26, this was anchored by the expectations of analysts at 3.2%. The expectations of businesses and trade unions were significantly higher at 3.9% and 3.7% respectively. The latter is important since prices are set in product and labour markets.

The key question is whether inflation expectations will remain anchored at a level consistent with the inflation target. Inflation expectations are partly a function of the credibility of the central bank. I believe that the downward shift in South African inflation expectations in part reflects the solid track record and inflation-targeting credentials of the South African Reserve Bank.

However, inflation expectations are also influenced by contemporaneous inflation. Indeed, expectations can be expected to drift higher if inflation trends higher. Already inflation is expected to increase towards 4% in the near term given fuel price increases. This is a critical point since the longer oil prices remain elevated, the greater the likelihood of inflation continuing to increase.  If so, it will be difficult to believe inflation expectations, which are currently still significantly above the desired level of 3%, continue to trend lower. Rather, the opposite would be likely. To maintain its credibility in this scenario, the Bank would likely lift its repo rate.