May 2026

Currency: On a risk-adjusted basis, the ZAR remains deep in overvalued territory against the USD (USD-ZAR undervalued), though slightly less so than at the beginning of the year. The model suggests that importers will enjoy a period of advantage even with a moderate weakening of the ZAR against the USD priced in over the remainder of the year. Movements in the pair continue to be driven by developments surrounding the Strait of Hormuz, which is feeding through into inflation and interest rate expectations. Supporting the USD are expectations that interest rates will remain higher for longer, as reflected in Fed fund futures.

Regarding domestic interest rates, the FRA market is pricing in at least two, and possibly three, 25bp rate hikes in 2026. Domestically, a prolonged war, with likely intensifying effects on inflation, interest rates, economic growth and government revenue collections, will partly negate the effects of a more constructive macro backdrop, as structural reforms are underway under the GNU government. This, in turn, will somewhat weigh on the ZAR’s resilience. Overall, the ZAR will remain volatile until there is a definite end to the war and is biased weaker, reflecting its sensitivity to elevated oil prices and global risk sentiment.
  • Inflation: Headline CPI edged higher to 3.1% y/y in March from +3.0% y/y in February. Recent fuel price increases resulting from the Iran war will fully reflect in April’s CPI reading, likely pushing headline CPI above the 4.0% mark with a further increase in May also expected, while food inflation could rise on the back of higher fuel and fertiliser costs.
  • Repo rate: The SARB held rates steady, choosing to wait for clearer signs on whether the Iran war will be short-lived or prolonged. Since then, the SARB has signalled a clear bias towards acting early on inflation risks, emphasising the dangers of delayed policy responses. Kganyago argued that late action risks embedding price instability.
  • Government Finances: March’s figures marked the end of the 2025/26 fiscal year, with the overall budget deficit narrowing slightly to -R330.9bn from -R334.9bn previously. However, the gross borrowing requirement worsened notably, widening to -R545.1bn from -R397.5bn in the prior year. Despite some external support, persistent structural challenges continue to drive reliance on debt financing. Fiscal indicators will likely come under further pressure, partly because of the ongoing Iran conflict.
  • GDP Growth: Q4 GDP growth rose marginally to 0.4% from 0.3% in Q3. On an annual basis, the economy grew by 1.1% in 2025, up from 0.5% in 2024. Some structural gains in the economy, particularly in energy, transport and logistics, likely supported this modest improvement. However, meaningful progress toward large-scale job creation will require addressing a range of other binding constraints on economic activity with urgency.
  • Offshore conditions: In April, offshore conditions remained volatile but less so than in March, driven by Middle East developments with a fragile ceasefire in place for much of the month, but the Strait of Hormuz standoff was ongoing. The VIX declined overall in April. Oil prices eased during the month before rising to around $108/bbl at month-end. These developments continued to underpin inflation risks, keeping global yields relatively high. Central banks broadly adopted a wait-and-see stance amid heightened uncertainty, while expectations for rate cuts into 2027 were scaled back. The US dollar traded in a more mixed pattern, strengthening during periods of escalation but softening on signs of de-escalation, mirroring shifts in global risk sentiment.
Read report