Things turn sour for South Africa
South African business sentiment weakened in the second quarter as consumers faced fresh pressures from the Iran war that’s clouded the outlook for inflation and interest rates.
The quarterly business confidence index compiled by FirstRand’s Rand Merchant Bank and Stellenbosch University’s Bureau for Economic Research dropped eight points to 39 in the three months through June.
That’s the weakest level since the third quarter of 2025, the data shows.
While the decline in the reading was broad-based, it was largely dragged down by consumer-facing industries, the lender said.
“The moderation comes against a shift in the global backdrop, as escalating Middle East tensions have driven higher oil prices and reshaped interest-rate expectations, prompting businesses to reassess the outlook,” the lender said.
South Africa’s Reserve Bank last week raised borrowing costs by 25 basis points to 7% — the first hike in three years — as it flagged intensifying inflationary pressures.
Policymakers also signalled that further monetary policy tightening will be warranted if the war drags on, while assuming that in the worst-case scenario, the policy rate would increase by at least a further 75 basis points by the third quarter of this year.
Since the US and Israel attacked Iran on 28 February, oil prices have surged by a third, pushing domestic gasoline prices to a record high.
“Businesses have had to adjust quickly to a less-supportive outlook, which weighed on sentiment across most sectors,” said Isaah Mhlanga, chief economist at RMB.
“Many respondents indicated that uncertainty had increased and that clients had become more cautious about spending and investment decisions.”
Any improvement in sentiment will depend on geopolitical tensions easing, oil prices stabilising, and more certainty about the outlook for interest rates, he said.
Interest rate pain is coming
South African central bank Governor Lesetja Kganyago promised that officials will lower the inflation rate back to its 3% target despite headwinds from the Iran war.
“Let there be no doubt, the South African Reserve Bank will be getting inflation back down to 3%,” he said. “I hope our history of delivering on our targets makes that promise convincing.”
The bank also signalled that further tightening may be warranted if the conflict drags on.
“By raising rates, we hope to send a clear and credible signal that we will keep inflation under control,” he said.
“I cannot tell you now if more will be needed, or how much. We take our decisions meeting by meeting. But the policy objective should be crystal clear.”
Inflation has drifted away from the central bank’s 3% target since the war began, driven by a surge in energy prices, and is projected to reach 4.9% as early as the third quarter this year, according to the bank’s latest forecasts.
Policymakers also considered a 50-basis-point hike last week and reviewed three scenarios, all of which implied additional tightening.
Locally, petrol prices are set to reach a record high this month after the government rolled back some temporary relief measures that had cushioned consumers against fuel-cost increases sparked by the Iran conflict.
The SARB adopted the 3% inflation goal last year, replacing a 3% to 6% range that had been in place since 2000.
Kganyago said there was no question of the central bank reverting back to the wider target and said the shift to 3% had delivered clear benefits to South Africa through lower government borrowing costs.
The country is in a better place now despite the Middle East conflict, he said.
“Target reform has been one of the big wins for South Africa recently,” he said. “We are not going to snatch defeat from the jaws of victory.”
By Ntando Thukwana and Bonolo Mokonoto for Bloomberg
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