Week in Review: Markets Pause as Oil Surges and AI Optimism Faces Its First Test

South African markets faced another challenging week. The JSE All Share Index edged 0.16% lower, masking significant divergence beneath the surface. Resource shares rallied 5.48%, benefiting from stronger commodity prices and higher oil prices, while Industrials declined 3.23% and listed property fell 2.67%. The rand weakened 1.96% against the U.S. dollar, while South African 10-year government bond yields rose to 8.89% as investors continued to price in inflation risks.

Last week’s key domestic event was the South African Reserve Bank’s decision to leave the repo rate unchanged at 7.00%. The Monetary Policy Committee acknowledged that the economy entered the year with encouraging momentum, but noted that recent developments have significantly clouded the outlook. Although first-quarter growth surprised positively, this was largely driven by exports rather than stronger domestic demand. Since then, consumer confidence has weakened, business sentiment has softened, and higher fuel prices following the renewed Middle East conflict have added further pressure to households and businesses.

Inflation remains above the Bank’s preferred target, with higher fuel costs expected to keep headline inflation above 4% into next year. Encouragingly, food inflation has continued to moderate, helped by favourable harvests and easing supply disruptions, while the rand has remained relatively resilient against the euro, limiting imported inflation. However, services inflation remains elevated across categories such as transport, housing and insurance, and inflation expectations have begun drifting higher among households, businesses and trade unions. These developments reinforce the importance of preventing temporary price shocks from becoming embedded in broader inflation.

Against this backdrop, the MPC voted to keep policy unchanged, with four members favouring a hold and two supporting a further 25 basis point increase. The Bank reiterated that policy remains appropriately restrictive for now and that future decisions will remain entirely data dependent. While its baseline forecast still anticipates interest rate cuts later in the forecast period as inflation gradually returns towards the 3% target, policymakers made it clear that a sustained rise in oil prices or further increases in inflation expectations could require additional tightening. Equally, a more favourable energy environment could allow interest rates to begin easing sooner than currently expected. Ultimately, the SARB emphasised that while monetary policy can anchor inflation, South Africa’s longer-term growth prospects will depend far more on structural reforms, particularly improvements in electricity, logistics, transport infrastructure and local government efficiency.