At the start of the year, the global economy appeared to be settling into a benign rhythm. Oil prices were expected to average around $60 a barrel, inflation was easing and central banks were preparing to cut interest rates.
That world has changed abruptly.
The disruption to energy markets following the war in the Middle East is a textbook supply shock, one that raises inflation while weighing on growth. As history has shown, how policymakers respond to such shocks matters as much as the shock itself.
For South Africa, higher global oil prices will feed directly into local fuel costs, pushing up transport and food prices and lifting headline inflation. The weaker rand will amplify this effect.
This has shifted the near-term inflation outlook. What was shaping up to be a relatively smooth road to the 3% target now includes a pronounced hump, with headline inflation set to move towards, or even above, 4% in the coming months.
Supply shocks pose a difficult trade-off for central banks. Unlike demand-driven inflation, which can be cooled by higher interest rates, external cost-push inflation is impervious — clearly, raising rates cannot lower oil prices or reopen shipping routes. This is why, in such episodes, central banks typically look through the first-round effects and react only if the price increase becomes embedded in broader inflation through rising wages, expectations and pricing behaviour.
This means the Reserve Bank’s best course of action right now is to remain prudent but resist the temptation to respond too quickly, not least because supply shocks tend to carry the seeds of their own reversal.
Higher oil prices act as a tax on global demand, eroding household purchasing power and slowing economic activity. Over time, this helps bring inflation back down, provided the shock does not intensify.
At the same time, as inflation rises and growth weakens, global real interest rates should decline, easing the pressure on emerging-market central banks to respond aggressively to defend their interest rate differentials.
Taken together, this suggests that the bar for further tightening remains high and that, for now, the appropriate stance is an extended hold rather than a pre-emptive hike.
Unfortunately, the combination of higher inflation and elevated uncertainty has pushed near-term rate cuts off the table. Even so, it would be premature to conclude that the easing cycle has been cancelled altogether. If the oil shock proves temporary and second-round effects remain contained, the underlying disinflation process should resume, meaning rate cuts will be delayed rather than derailed.
That said, rate hikes cannot be ruled out should the shock prove persistent, lifting inflation expectations, or be accompanied by further rand weakness.
Does this mean it was a mistake to lower the inflation target to 3%?
Periods like this inevitably raise questions about the appropriateness of the inflation target, especially after the downward shift to 3%. If inflation is driven by external shocks, should the central bank be more flexible?
The short answer is no. As Bank governor Lesetja Kganyago put it in 2022, when South Africa was battling imported inflation after the outbreak of war in Ukraine, if a snake enters your tent, you do not ask if it came from the demand side or the supply side, you deal with the fact that it is there.
The credibility of the target is precisely what allows the Bank to look through temporary shocks. If households and firms believe that inflation will return to 3% over the medium term, then the risk of second-round effects remains contained.
Abandoning or diluting the target in response to a supply shock would have the opposite effect. It would risk de-anchoring expectations and make the inflation process more persistent, ultimately requiring a more aggressive policy response. In that sense, the current environment strengthens, rather than weakens, the case for maintaining the 3% anchor.
Is South Africa’s recovery going to be snuffed out?
The oil shock is complicating both the global and domestic growth outlook. Rising energy prices are already feeding into higher input costs and softer demand across major economies. The result is an uncomfortable mix of slowing growth and rising inflation.
Whether this evolves into a full-blown global recession will depend largely on the duration of the shock. A short-lived disruption can be absorbed. A prolonged one risks tipping the global economy into a more persistent period of low growth and elevated inflation.
The risk is not that the recovery collapses entirely, but that it stalls
At the start of the year, there were tentative signs that South Africa’s economy was gaining some traction. Business confidence had improved and growth, while modest, was moving in the right direction. But it was always a fragile recovery.
Higher fuel costs, rising inflation and the prospect of tighter monetary policy now threaten to erode that momentum. Households face renewed pressure on disposable income, while businesses must contend with higher input costs and a more uncertain global environment.
The risk is not that the recovery collapses entirely, but that it stalls.
Ultimately, the economic impact will depend less on how high oil prices go in the short term and more on how long they stay there. If the disruption is resolved within weeks, the effects will be uncomfortable but manageable: a temporary inflation spike, delayed rate cuts and a modest growth slowdown.
If it persists for months, the trade-offs will become more severe: higher inflation, tighter policy, and weaker growth, globally as well as domestically.
South Africa cannot control the oil price; what it can control is whether it builds enough resilience to withstand shocks like these. Given the collapse in domestic refining capacity, South Africa is heavily dependent on imports of refined fuel and vulnerable to supply and shipping disruptions. The fear is that the country may have just two to three weeks of fuel reserves left compared to the global benchmark of at least 90 days.
South Africans may point fingers at US President Donald Trump for starting the war, but it is worth remembering that in a deeply uncertain world, the difference between muddling through and economic lift-off will depend less on what happens abroad and more on what we get right at home.
IJssel de Schepper is the chief economist of the Bureau for Economic Research
