Oil prices, which had declined to about $70 a barrel earlier this month, have now rebounded to roughly $90. For the global economy, the war has disrupted supply chains and impacted incomes. At the same time, the artificial intelligence boom has delivered an offset with huge investments in data centers and elevated valuations for AI-related companies. Overall, world growth and inflation forecasts are largely unchanged since our last meeting.
Among the major central banks, both the Bank of Japan and the European Central Bank raised rates at their June meetings, which was expected. Meanwhile, the Bank of England, the People's Bank of China, and the US Federal Reserve have been on hold. That said, Fed communications have emphasized the importance of price stability and rates have shifted up significantly at the short end of the US yield curve. In this context, the dollar has strengthened against other major currencies.
Moving to South Africa, first quarter growth was stronger than expected, running close to 2% year on year. However, this was due to higher net exports rather than domestic demand. We anticipate slower growth through the second and third quarters of this year. Consumer confidence has fallen sharply and business confidence has also weakened. Sectoral data show generally lower activity since the start of the war. Prices for our export commodities have also fallen. Although terms of trade are better given lower prices for imports.
We started this year with good momentum, but households have suffered from higher fuel prices while uncertainty has weighed on investment. It is also increasingly clear that municipal dysfunction has become a binding constraint on growth. With domestic reforms, we think the economy can get back to a rising growth trend as global conditions stabilize. Our baseline forecast is that the economy starts to recover in the second half of this year as the shock fades, but the outlook is uncertain. We see downside risks to growth.
Turning to inflation, recent prints have been well above target, mainly because of higher fuel costs. Petrol and diesel prices eased this month, but global prices have now risen again. We expect headline inflation to stay above 4% until early next year. Aside from fuel, goods prices have been relatively contained. The exchange rate has been resilient and the rand is close to where it started the year against the dollar and it is now stronger against the euro. This has helped with import prices. Food inflation has also slowed recently. This reflects good harvests as well as fading effects from the outbreak of foot and mouth disease. El Nino may start affecting food supply next year, but this is still a risk factor not part of our baseline. For services inflation, conditions look problematic with most components now well above 3% including insurance, transport, and housing. Our various measures of underlying inflation also indicate stronger inflation pressures.
According to the latest survey from the Bureau for Economic Research, inflation expectations have risen. The changes are bigger for the near term than the longer term. All survey groups anticipated higher inflation with the biggest change coming from trade unions. As for market expectations, break-even rates have eased since May, but they are still higher than they were at the start of the year. We see upside risks to inflation.
Against this backdrop, the committee decided to keep the policy rate unchanged at 7%. Four members preferred a hold while two favored an increase of 25 basis points. The committee agreed that the outlook is uncertain and with the rate increase at our previous meeting, the policy stance is appropriate for now with rates somewhat restrictive. The forecast from our quarterly projection model shows the policy rate broadly stable through the remainder of the year. The model shows cuts later in the forecast as inflation falls to 3% and rates adjust towards neutral levels.
As before, this rate path remains a broad policy guide and our decisions will continue to be taken on a meeting by meeting basis with careful attention to the outlook, data outcomes, and the balance of risks to the outlook.
To support our risk assessment for this meeting, we considered scenarios for inflation expectations as well as fuel prices. For expectations after the upside surprise in the recent survey, we looked at what could happen if inflation expectations keep on rising throughout this year. The scenario showed extra pressure on wages which feeds through to core inflation. The core model therefore sees tighter policy with one more rate hike than the baseline forecast and rates staying higher for longer after that.
For fuel, the recent volatility in oil prices shows that we face both upside and downside risks depending on how the Middle East conflict evolves. We therefore considered an adverse case with oil at $100 a barrel for 2026, easing slowly to $80 by 2029. That was paired with a positive scenario where oil is $78 this year, falling to $60 by 2029. The adverse scenario has inflation persistently above target with the shock feeding through to food prices as well as coal. This requires an extra hike this year and an extended period of restrictive policy. By contrast, the favorable scenario shows inflation returning to target more rapidly, implying that rates start easing in the current year.
To conclude, the inflation outlook has improved slightly since our last meeting, but inflation is still too high while growth is weak. We are setting policy to achieve 3% inflation over time, ensuring the current supply shock does not de-anchor inflation expectations. At the same time, we recognize that South Africa's growth prospects will be driven mainly by domestic reforms. This covers structural interventions such as fixing local government and improving productivity in network sectors like transport and energy. It also includes the macroeconomic goals of sustainable debt and permanently lower inflation. Our main contribution is to stabilize inflation within line with our 3% target over time and the MPC will act as needed to achieve that.
That concludes our statement and we will take questions from the members of the press and as usual please identify yourself and the house you represent and we will direct your questions as appropriate. Copan.
I was going to take three questions, but you asked three questions. So, let me deal with the questions right away and then I'll go to the next one. Inflation is 200 basis points above target. That is the last print. That is in the past. There is nothing we can do with last month's inflation. Our focus is on inflation within the horizon. There is nothing monetary policy can do with this month's inflation or next month's inflation or even the September inflation; it's outside of the monetary policy horizon. And that's why you see us taking a view that takes you a few quarters ahead and this time around we also added quarters of 2029. You say what brought the forecast down? A number of factors. You might have realized that when we were at the main meeting we had the oil price assumption averaging $91 a barrel for the year and we now have $82 a barrel for the year. The rand had been resilient. We have got food disinflation that is actually taking place. We have already had a drop in the domestic price of fuel at the pump. You might have another one going up. It is very volatile. But that is the environment that we are operating in. You said what gives you confidence? We have got to work with the information we have and that is why we cannot tell you for sure what's going to happen and we say we will take every decision meeting by meeting depending on the data, the outlook, and the balance of risks to the outlook. That is the stance that we would take. And of course that answers your second question. We have revised the headline inflation lower.
Core is continuing to rise. We are watching that very closely. But we still expect core to peak at 4.1% in the first quarter of next year. And this year we expect it to be just below 4% for this year. So that gives us the basis on which to move. You would also see in the statement we do refer to the other measures of underlying inflation. We have developed these other measures that determine what underlying inflation is because there tends to be this narrative that says it's because of oil so you can do nothing about inflation and we say okay let us remove all these volatile prices and see what happens. So whether you look at the super core measure or whether you look at the trimmed mean or the principal component core component of inflation, common component of inflation, you will see that they are ticking up but even as they are ticking up they are not outside of the tolerance bands. But we will continue to watch those. The important thing about all of those measures is that if they continue accelerating it tells you that second round effects are starting to kick in and you will have to calibrate policy accordingly.
Services inflation has been an issue for us. For a long time services inflation was so contained. It is now beginning to rise and a closer look shows that it is driven by medical insurance and other insurance services. But we think that you might actually be seeing housing and utilities also beginning to kick in. But still services inflation is expected to be just above the tolerance band. But overall inflation will be within the tolerance band and closer to 3% by the end of next year and into 2028 and 2029 it should be bang on target. Um, the next row.
