South Africa’s inflation slowed to its lowest level in years in February, but economists warn that escalating tensions in the Middle East could derail hopes for imminent interest rate relief.

Headline consumer inflation eased to 3% year-on-year, down from 3.5% in January, in line with the South African Reserve Bank’s target.

Core inflation, which strips out volatile items, also softened to 3%, while inflation expectations dropped to a historic low of 3.6%.

Momentum Investments has noted that this signals “progress toward the new inflation target of 3%,” but cautioned that the outlook has become increasingly uncertain.

Conflict-driven risks emerge

In a statement, Momentum Investments Economists, Sanisha Packirisamy and Tshiamo Masike, have warned that the ongoing conflict in the Middle East is already feeding into global prices.

“The conflict has driven a surge in international oil prices, shipping costs and fertiliser prices,” they said, adding that risks remain “tilted to further upside pressure.”

Oil prices have surged sharply in recent weeks, with disruptions to key supply routes like the Strait of Hormuz amplifying concerns about sustained cost pressures.

They caution that higher oil prices pose an “imminent threat to fuel and transport inflation,” while rising fertiliser costs could translate into broader food price increases over time.

Fuel shock looms

Early estimates point to a significant fuel price shock in April, with petrol expected to rise by more than R4.50 per litre and diesel by over R7 per litre, potentially the largest monthly increases on record.

This is expected to reverse recent transport deflation and push inflation higher in the coming months.

Rate cut hopes fade

Despite February’s encouraging inflation print, Packirisamy and Masike say the case for a rate cut has weakened.

“Had it not been for the ongoing Middle Eastern conflict, February’s softer inflation outcome and historically low inflation expectations… would have strengthened the case for a March interest rate cut.”

However, they stressed that monetary policy is forward-looking, and rising risks now “cloud the inflation trajectory.”

Momentum’s baseline view is that the South African Reserve Bank will hold the repo rate at 6.75% in the near term, with rate cuts only likely to resume in late 2026 or early 2027 if oil prices ease.

Risk of hikes returns

In a more severe scenario, prolonged geopolitical tensions could force policymakers to tighten instead.

“Prolonged tensions could even trigger interest rate hikes should inflation expectations rise significantly,” the economists warned.

Ultimately, the group said the duration of the conflict will be key in determining whether inflation pressures are temporary or more persistent, and how aggressively the Reserve Bank will need to respond.