Economic Update March 2026

The Downside

The war in the Middle East is exacting a heavy toll on all of the world’s key currencies, whilst also threatening to lead to higher inflation and, potentially, higher interest rates. Central banks, including the South African Reserve Bank, are obviously alert to the effect that the spike in oil prices will exert on inflation but, except for Australia, have not yet resorted to interest rate hikes.

The authoritative Geopolitical Risk (GPR) index developed by Caldara and Iacoviello, two economists at the US Federal Reserve, examines the evolution of different levels of geopolitical uncertainty since 1900. The most profound spikes in the GPR index occurred around the two world wars; Korean War; Cuban Missile Crisis; the previous two Gulf wars; 9/11 terror attacks in the US; Russia’s military invasion of Ukraine; and the current Gulf war.

The hostilities in the Middle East are exerting more or less the same instability in the oil and fuel industries than four years ago, when Russia's military invasion of Ukraine also led to supply disruptions and sanctions, which restricted oil supplies from the world's second largest oil producer. The combined oil deficit (consumption minus production) of the world’s four largest economies amounts to a staggering 32 million barrels per day. Most nations are suffering as a result of the 83% increase in the price of Brent crude oil since the start of the year and diplomats are working around the clock to persuade the US and Iran to reach a ceasefire.

Until now, the impact of the Middle East war on South Africa has been limited to a weaker currency and increases in fertilizer and fuel prices. The 40% month-on-month increase in the price of diesel is bound to place pressure on most industries, especially agriculture.

The Upside

Inflation under control

During the January meeting of the Reserve Bank’s Monetary Policy Committee (MPC), two of its six members voted for a 25 basis point reduction of the repo rate, but they were outnumbered by the other four who chose to hold the rate steady. This provided hope for a rate cut in March, especially due to the declines in both the consumer price index (CPI) and the producer price index (PPI) during February. The CPI declined from 3.5% to 3% and the PPI dropped from 2.2% to 1.8%. Inflation at the factory gate has now been below 3% for 19 successive months and this price gauge serves as a leading indicator for consumer price trends.

Inflation under control

Unfortunately, however, the war in the Middle East and the ensuing sharp increases in oil and fuel prices prompted the MPC to continue pausing its rate-cutting cycle, which began in September 2024. The prime overdraft rate therefore remains at 10.25%, which is still higher than the rate that existed before 2020 and a full 325 basis points higher than the rate that existed between July 2020 and October 2021.

Although the spike in fuel prices will inevitably filter through to higher inflation, the current low base of inflation provides the MPC with substantial breathing space to keep the lending rate steady, for now, with the prospect of lower rates in 2026 still very much alive. All that is required for a further relaxation of monetary policy is a swift ending to the war in the Middle East.

Decline in credit impairment ratio

As a general rule, the ratio of bank impairments (bad debts) as a percentage of total bank assets exhibits a positive relationship with the level of interest rates. This has been prevalent during the past decade.

During the tenure of the previous Governor of the Reserve Bank, Gill Marcus, monetary policy was fairly accommodating, with the real prime lending rate averaging 3.4% between 2011 and 2015. Despite the real prime rate edging up to 4.4% between 2014 and 2017, bank assets continued to increase at a healthy rate in real terms during this period.

Decline in credit impairment ratio

After the appointment of a new Monetary Policy Committee in 2015, the prime rate was systematically increased to 5.7% in 2019 (in real terms), leading to an increase in credit impairments and also as a ratio of bank assets.

The low interest rates that followed the lockdowns of 2020 reversed this trend but record high interest rates during 2023 and 2024 saw another spike in bank loan write-offs. Fortunately, the modest decline in the real prime rate during 2025 has now reversed this trend.

Solid export performance 

South Africa’s international trade account has started 2026 on a high note, mainly as a result of lower imports and the record prices for gold and platinum. Despite only half of the top-ten export sections recording a trade surplus during the first two months of the year, the 39% year-on-year increase in the value of precious metal exports played a key role in securing a healthy cumulative trade surplus of R45.4 billion - dwarfing the meagre R3.3 billion surplus recorded in January and February last year.

The top three contributors to the cumulative trade surplus during January and February were the sections for precious metals; minerals; and agriculture & food, contributing 62.8% tot total exports.

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Dr. Botha

On Balance, by Dr Roelof Botha, deliberately emphasizes positive news. It often highlights the resilience of the South African economy and the immense scope for new business opportunities.