The government is facing growing pressure to slash the fuel levy ahead of increasing pump prices as geopolitical tensions between the US and Iran continue to mount.
The issue took centre stage at the South African Reserve Bank’s (SARB) monetary policy committee (MPC) repo rate announcement on Thursday, when the Bank unanimously elected to keep the policy rate unchanged at 6.75%, noting that the conflict is placing pressure on fuel prices.
The fuel levy was a compromise in last year’s budget speech, after a proposal to hike value-added tax forced the postponement of finance minister Enoch Godongwana’s budget tabling in February 2025, causing his second attempt at a budget to be rejected.
The passing of the budget in May last year included an increase of 16c/l to the fuel levy for petrol and 15c/l for diesel in June 2025. Last week, the Western Cape High Court ruled that the minister’s bid to raise VAT unilaterally was inconsistent with the constitution.
SARB governor Lesetja Kganyago said while the consumer price index print settled within the new official target of 3%, the central bank would have to thoroughly assess when cuts would be possible. Given the global uncertainty presented by the conflict, he said, the MPC considered two alternative scenarios, both with more adverse assumptions than the baseline.
The second more extreme scenario has the war lasting over a year, with oil prices staying above $100 per barrel and the rand 10% weaker.
— Lesetja Kganyago, SARB governor
“The first scenario assumes that the conflict lasts another two months or so, with oil prices averaging nearly $100 per barrel for this period and the rand about 5% weaker against the dollar.
“The second, more extreme scenario has the war lasting over a year, with oil prices staying above $100 per barrel and the rand 10% weaker. In both scenarios, inflation is higher, exceeding 4% in the first version and 5% in the second.”
The repo rate announcement and concerns about fuel price pressures have brought into sharp focus discussions about the government’s intentions to intervene with a fuel levy cut or other long-promised reforms about how the levy is formulated and determined.
Kganyago said both scenarios call for higher interest rates this year, with one hike in the first scenario and several more in the other.
“Inflation then slows as oil prices start easing and the policy response takes effect. In the first scenario, we are back on target in 2027. In the second scenario, this only happens in 2028. In both cases, growth is weaker initially, but there is some catch-up later.”
Asked if the MPC was considering communicating to the government about the possibility of a fuel levy cut, Kganyago said that the central bank would not make decisions ahead of government policy or announcements.
Godongwana told parliament during a National Assembly plenary on Wednesday that cabinet had set up a committee that would investigate whether the fuel levy would need to be cut to ease fuel price risks as a result of the US-Iran war.
“Cabinet has set up a committee, and that committee is going to look at the impact of the war in general. Among the terms of reference is to say what it is suggesting the government should do on the fuel price.”
Asked whether he planned to appeal the Western Cape High Court judgment ruling on the attempted VAT hike, Godongwana said: “I have sought legal advice and will make a decision based on that advice. At the moment, I have not yet made that decision.”
At the same plenary, minister of mineral & petroleum resources Gwede Mantashe urged South Africans not to panic about any risk of fuel supply pressures due to the US-Iran war, saying that the country’s supply nodes are diverse enough to remain largely unaffected.
“Inland supply is supported by stable refining. Sasol, Sapref [South African Petroleum Refineries], and the coal-to-liquid refinery in Secunda are ensuring that there is a reliable supply of energy. And even the Cape Town refinery maintenance shutdown will end at the end of April. That means it will add to the reliability of supply in the country.”
The decision to keep rates on hold reflects a cautious wait-and-see approach and reflects the G4 central banks’ approach. There are two takeaways. The rate-cutting cycle has been deferred, and there is greater reliance on scenario analysis amid elevated uncertainty
— Tertia Jacobs, treasury economist and fixed income specialist at Investec
Tertia Jacobs, treasury economist and fixed income specialist at Investec, said the decision to hold rates was expected and reflected caution from the central bank during a period of relative uncertainty.
“The decision to keep rates on hold reflects a cautious wait-and-see approach and reflects the G4 central banks’ approach. There are two takeaways. The rate-cutting cycle has been deferred, and there is greater reliance on scenario analysis amid elevated uncertainty.”
Reflecting on the scenarios outlined by Kganyago on Thursday, Jacobs said central banks would be keen to understand how long the conflict could potentially continue.
“With the first scenario, the intermediate scenario, there could be a hike of about 25bps [basis points]. The reason why it looks fairly shallow is that the starting point of monetary policy is restrictive. In the second, they didn’t specify, but there would be several rate hikes. That would be one where inflation rises on a much more sustained basis and would require a much stronger monetary policy reaction.”
The May MPC meeting will be interesting in terms of how the geopolitical developments evolve, Jacobs said, with April’s inflation rate rising sharply to 4.8% if there is no government intervention to reduce the fuel levy.
Cosatu parliamentary co-ordinator Matthew Parks welcomed the “sober decision not to increase the repo rate despite inflationary pressures due to the pending fuel price hikes”.
“The federation urges swift action by government to cushion society from the massive fuel price hikes due to come into effect on April 1, of nearly R6/l of petrol and R10/l of diesel.
“These hikes are due solely to the ongoing war in the Middle East and the havoc it has caused to international oil and gas supplies and prices.”
A prolonged period of elevated oil prices would shift South Africa from a period of enjoying fuel price deflation to one of renewed fuel-driven inflationary pressure
— Mamello Matikinca-Ngwenya, FNB chief economist
He said these unprecedented price hikes will have a decidedly negative impact on the working class and the economy. The most urgent action needed before Wednesday’s fuel price hikes is to immediately suspend or lower the fuel levy and taxes for the duration of the war.
Dr Andrew Golding, CEO of the Pam Golding Property group, said while the MPC’s decision to keep the repo rate steady was disappointing yet unsurprising, it provided stability for households with existing mortgages and aspirant home buyers, particularly in the face of surging fuel prices and increased municipal tariffs.
“Currently, heightened geopolitical tensions and disruptions to global shipping routes are injecting some uncertainty into the economic outlook, with the duration of the disruptions emerging as the key risk factor for inflation, interest rates, and South Africa’s housing market.”
FNB chief economist Mamello Matikinca-Ngwenya said it was evident that central banks across the globe will be cautious as the ramifications of the ongoing war in the Middle East unfold.
“While South Africa’s current inflation rate is at the 3% target and surveyed inflation expectations showed further softening in quarter one of 2026, the country is a net-importer of petroleum products and will be exposed to higher energy costs from April.
“A prolonged period of elevated oil prices would shift South Africa from a period of enjoying fuel price deflation to one of renewed fuel-driven inflationary pressure.”
She said upside fuel and rand risks, along with the potential for second-round effects, raise the degree of uncertainty around the inflation trajectory and limit the Bank’s room to continue cutting rates.
Business Times
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