Reality check for South Africa
While oil prices are crashing, fuel prices are receding, and market sentiment is turning positive once more, South Africans should not be lulled into a false sense of security.
According to investment management firm Efficient Wealth, the sudden turn should be seen as small relief, not rescue, with inflation pain baked in, and markets not fully buying into the recovery.
The group noted that the worst-case crisis scenarios many investors had pencilled in as a possibility following the United States’ war in Iran have subsided.
“$180 oil, food inflation, collapsing currencies, and central banks being forced to choose between growth and credibility…the worst case seems to have faded,” the group said.
“A ceasefire has been signed, the Strait of Hormuz is reopening, and oil prices have fallen sharply from their peak.”
Despite this, the reality of the matter is in what has not happened, it said.
“Bond yields have not collapsed. The dollar has not surrendered its gains. Central banks have not declared victory.”
The investment group said that markets have received good news, “but the problem has not gone away”, adding that this is the lesson that South Africans should take seriously.
“The world did not escape an inflation shock. It merely escaped the most dramatic version of one,” it said.
The threat remains the second-round effects of the massive fuel price hikes that occurred in April, May and even June.
Efficient Wealth noted that energy inflation “travels” and does not stay contained in fuel prices alone—it moves to transport, fertiliser, food, manufactured goods, and wage demands.
“Once those second-round effects begin, cheaper oil helps, but it does not rewind the clock. A family may see relief at the pump, while still paying more for groceries,” it said.
“A business may have lower fuel costs, but still face higher input prices. Inflation is not a light switch. It is more like dye in water.”
Expect pressure to linger
It’s these second-round effects which have kept central banks, including the South African Reserve Bank, on edge.
The bank’s Monetary Policy Committee (MPC) voted to hike rates by 25 basis points in May, anticipating higher inflation and pressure from second-round effects emanating from the war.
At that meeting, expectations were looking ahead to at least one or possibly two more interest rate hikes this year as global energy flows remained blocked.
As the US and Iran moved closer to a ceasefire and following the reopening of the Strait of Hormuz, talk of rate hikes eased to only one hike, later in the year.
Some economists now see interest rates on hold for an extended period, moving to cuts again in 2027—skipping more hikes altogether.
However, this will all hinge on where inflation goes.
Critically, the global fuel crisis is only part of the picture, with a confirmed El Niño weather phenomenon also threatening to impact crops and, subsequently, food prices.
One key metric will be revealed next week, when the Bureau for Economic Research publishes its latest inflation expectations survey.
According to economists at Nedbank, the trend will be closely scrutinised to assess the extent to which the sharp fuel price increases in April and May affected expectations.
“A significant increase above 3% would raise the chances of another hike when the Monetary Policy Committee announces its decision on 23 July,” the bank said.
The bottom line, and reality for South Africans, is that things are still in flux, and no one should be fooled into thinking the bad times are over.
“Oil prices can fall, and interest rates can remain high. The rand can weaken even after good local news. Food inflation can persist after the geopolitical headline improves,” Efficient Wealth said.
“The great mistake now would be to confuse the end of the emergency with the return of normality. The crisis may be less frightening than it was a month ago, but the bill is still moving through the system.”
Loading ...