Monitoring the potential effect of US-Israel-Iran war on SA’s inflation, trade balance and interest rate outlook

The escalating Iran–US–Israel conflict has heightened geopolitical risk in the Middle East, triggering direct military strikes and retaliatory attacks and exposed strategic chokepoints such as the Strait of Hormuz, which accounts for 20% of oil trade flows. Oil markets reacted sharply, with Brent crude surging toward multi-month highs of $79/bbl from $72/bbl on Friday on fears of disrupted supply through the strait—through which roughly 20% of global crude transits—while major energy traders temporarily suspended shipments amid security concerns, pushing shipping costs and war-risk premiums higher. OPEC+ will increase daily oil production by 206K per day. But the geopolitical risk premium will remain elevated, with oil prices already rising $10/bbl from $60/bbl in January (total increase $19/bbl). The contagion from the regional conflict and its impact on infrastructure are unfolding. Iran has launched drone and missile strikes across Gulf countries, including Cyprus, and Saudi Arabia’s largest oil refinery closed after a drone attack this morning.

After an intense morning in SA’s market where bond yields traded ~25bps higher and then retraced 15bps, trading remains orderly. The conflict has weighed on global risk sentiment, generating a modest but broad-based risk-off move across equity markets. European indices declined (Euro Stoxx 50 -2.4%, DAX -2.4%), the Nikkei 225 (-1.4%), and Turkey’s equity market (-2.3%), likely reflecting its geographic proximity to Iran and associated geopolitical and refugee-flow risks.

In contrast, South Africa’s JSE All Share Index remains in positive territory, rising 0.2%, driven by higher mining stock prices (+2.2%) amid strengthening gold prices and safe-haven demand. This divergence highlights the commodity channel as a partial buffer for resource-intensive equity markets such as South Africa. The other side of the coin is that South Africa is a net oil importer, with terms of trade and relative movements in precious metal prices vs. the oil price as important drivers. 

The reaction of the US dollar index (DXY) has been closely monitored given the dollar’s status as a reserve currency. Since May 2025, markets have increasingly priced “debasement” and fiscal-risk narratives into positioning, leading to a greater prevalence of dollar-hedging strategies. However, foreigners continue to accumulate US financial assets (with increased exposure to equities and corporate bonds), while net purchases of UST remain positive but have moderated at the margin. Historically — including during the pre-2025 period — global risk-off episodes were associated with appreciation in US financial assets, particularly via flows into dollar-denominated safe assets such as US Treasuries. With elevated domestic and foreign policy uncertainty, there has been a surge in demand for new safe-haven assets. These include gold, CHF, and German Bunds. However, the CHF has depreciated by 1.1% today, similar to the USDZAR’s movement.

The USDZAR closed at R15.95/$ on Friday, traded higher at R16.20/$ early on Monday morning, and has subsequently traded in a narrow range of R16.05/$ to R16.13/$. SAGBs experienced notable volatility this morning. The R2035 yield rose by approximately 25bps from Friday’s close of 7.95% to 8.20% at the peak of the move, before retracing to 8.08% and currently trading at 8.11%. FRA rates have edged higher, as the probability of a 25bps rate cut at the March MPC meeting is fading. The 9×12 FRAs (Dec 26) are trading at 6.38%, indicating that a total of 50bps of rate hikes are no longer fully priced in. 

The central focus remains the duration and regional scope of the conflict, a sustained increase in the oil price and inflationary and growth dynamics.

SA transmission channel

For South Africa, the primary macroeconomic transmission channels operate through (i) the direct and second-round inflationary effects of higher oil prices, and (ii) changes in global trade flows and commodity prices, with implications for the trade balance, current account dynamics, and capital flows.

Inflation channel

Higher oil prices feed directly into domestic fuel prices, placing upward pressure on headline CPI and potentially complicating the SARB’s disinflation trajectory. The SARB’s reaction function is to look through first round effects (higher fuel prices) while monitoring second-round effects via transport and core CPI inflation.

The first-round impact of a higher oil price operates directly through the regulated fuel price mechanism. Based on current pricing dynamics, petrol could increase by approximately 20c/l in March, while diesel may rise by around 62c/l. In April, administered price adjustments will add further pressure, with a 9c/l increase in the general fuel levy and an 8c/l rise in the RAF levy.

Our oil price scenario analysis suggests that (1) if the Brent spot price stabilises at $78/bbl, the direct fuel price pass-through would add approximately 0.3ppt to April CPI inflation, lifting it to 3.6% (from our March projection of 3.4% which incorporates an increase in fuel and diesel prices of 20c/l and 62c/l). An oil price of $85/bbl would imply a larger contribution of roughly 0.7ppt, raising headline CPI to around 3.9%.

For reference, the SARB’s adverse scenario presented at the January MPC incorporated a weaker rand (R18.50/$) alongside an oil price of $75/bbl, which would push inflation closer to 4.0%. This highlights the sensitivity of the inflation outlook not only to the oil price level, but also to exchange rate pass-through dynamics.

Interest rate outlook:

The SARB usually finalises its forecast assumptions two to three weeks before an MPC meeting. The next MPC meeting is scheduled on Mar 26. The next two weeks are therefore critical in shaping our probability assessment of a 25bps rate cut in March. President Trump has given an indicative timeline of four to five weeks for the war to continue. Our base case was for a 25bps rate cut at the March MPC meeting, with the government reinforcing its commitment to fiscal stabilisation in the February 2026 Budget. Price movements in oil prices and the exchange rate in the coming weeks are particularly important for policy calibration. The rand continues to trade below the January SARB FX assumptions of an average of R16.54/$ and R16.73/$ in Q1 and Q2, respectively. Importantly, the SARB’s baseline projections assume Brent crude averaging around $65/bbl in 2026. Most of the calibration is therefore likely to emanate from the oil and fuel price assumptions.

Caution is likely to creep into the monetary policy outlook:

We now assess the probability of a rate reduction at approximately 35%, conditional on a stabilisation in oil prices and the rand. Absent such stabilisation, April is likely to see a material increase in petrol prices, which would lift the near-term inflation profile and shift the balance of risks to the upside.

External balance channel – current account

As a net oil importer, South Africa faces a deterioration in its trade balance when oil prices rise, particularly if not offset by stronger precious-metal exports. A sustained increase in the oil import bill would widen the current account deficit and increase sensitivity to portfolio flow volatility. South Africa is a net importer of both crude oil and refined petroleum products. The oil import bill peaked at R424.2bn in 2023 and has since declined to R341.5bn in 2025, reflecting a combination of lower international oil prices and reduced import volumes.

Our estimates suggest that, all else equal, an average Brent price of $78/bbl would increase the annual import bill by approximately R15bn, while an average price of $85/bbl could raise it by closer to R40bn. This underscores the sensitivity of the trade balance to relatively modest changes in the oil price.

That said, South Africa’s terms of trade remain supportive. Increases in gold and platinum prices have outpaced the rise in oil prices, providing an important offset through stronger export receipts. In 2025, the cumulative trade surplus amounted to R199.2bn, with export values rising by 2.8% and imports increasing by only 1.2%. The relatively subdued growth in imports largely reflects the decline in the oil import bill. The trade surplus has helped contain the current account deficit to approximately 0.7% of GDP, partially offsetting persistent deficits on the income and services accounts.

While markets have traded orderly today, we think a high level of uncertainty could see the rand and bond yields drift slightly higher as markets await a fresh direction. A key difference with Russia’s invasion of Ukraine in February 2022 is that food and oil prices surged in the aftermath of the attack. In Iran, it is mostly about oil and natural gas prices.  

Further, South Africa’s response to the weekend’s developments has been carefully crafted amid intensifying geopolitical risk. Further, the inquiry into Iran’s participation in naval drills with China in SA waters has now moved from the Minister of Defence to the President’s office.

Written by Tertia Jacobs
Treasury Economist at Investec Corporate and Investment Bank
Date of publication: 3 March 2026