Petrol price double-blow for South Africa

 ·18 Apr 2024

Not only do South African motorists have to contend with rising fuel prices, but the knock-on effect on inflation is contributing to the rising cost of living and cutting hopes for interest rate cuts this year.

Stats SA published the latest inflation figures for March 2024 this week, showing that headline CPI eased for the month more than expected.

Inflation lowered from 5.6% in February to 5.3% in March, helped along by easing food prices.

However, despite the welcomed surprise, inflation remains above 5% and far above the 4.5% targetted by the South African Reserve Bank to trigger an interest rate cutting cycle. Economists and analysts are also pushing their average inflation projections higher for the year.

Investec and the International Monetary Fund (IMF) have both pushed their average projections from 4.7% to 4.9% for the year – expecting the headline CPI rate to only hit an average of 4.5% in 2025.

The main reason for this outlook comes down to both volatility in the global oil and petroleum markets, and uncertainty around the impact of adverse weather conditions on food prices.

Global oil prices are on shaky ground, fluctuating significantly between $85 and over $90 a barrel.

According to Bloomberg analysis, oil markets have held below $88 a barrel this week as markets faced conflicting signals.

There are reports of rising stockpiles in response to tensions in the Middle East – but other reports of the United states reimposing sanctions on crude from Venezuela are adding to pressures.

Overall, however, oil prices are much higher this year, the group said, with supply cuts from oil-producing nations (OPEC+) and geopolitical risks in the Middle East and Russia have combined to lift prices. Speculative trades even put prices at $100 a barrel – although this ascent has faltered, Bloomberg said.

Rising oil prices are currently the biggest contributor to under-recoveries for petrol in South Africa right now, with the latest data from the Central Energy Fund (CEF) putting a petrol price hike of around 35 cents per liter on the map for May.

Petrol prices have climbed by a net R1.80 so far this year, with increases in February, March and April after starting the year off with a decent 76c per litre cut in January. Another 35 cents per litre hike in May would take this up to R2.15, and push prices back above R25 a litre.

This also means that the inflationary pressure attributed to petrol price hikes is likely to continue.

March recorded a petrol price increase of R1.21/litre, which exerted some marked upward pressure on inflation – a 0.3% contribution to m/m inflation, which was the largest contribution overall. Petrol price hikes in April are expected to also factor into inflation data for that month.

With inflation being kept higher than desired, indebted South Africans can also expect to suffer in the longer term, with markets slowly pricing out interest rate cuts in 2024.

The year started with an optimistic view on interest rates, with many hopeful for an early (March) start to a cutting cycle. However, given the inflationary pressures present, this was quickly pushed back to a mid-year cut (around July).

Expectations are now for an even later cut – hopefully September, but more likely November – with some even betting that there will not be any cuts at all in 2024.

The quantum of the cuts has also dissipated.

Initial projections were for 100 basis points to be cut in 2024. This was soon lowered to 75 bp, then 50bp. Most economists now expect at least one 25 bp cut – but there are risks that the ultimate figure could be zero.

“Inflation is having a key effect on consumer affordability in South Africa, and the South Africa Reserve Bank recently reaffirmed its resolve to continue to combat high inflationary pressure in South Africa,
stating that interest rates will only be cut once CPI inflation achieves, and then remains, around 4.5% y/y,” said Investec chief economist, Annabel Bishop.

“This is increasingly looking like an interest rate cut will only materialise in November for SA, instead of September, as CPI inflation is only likely to be at 4.5% y/y for one month in September, while the inflation print is also delivered a month late, in October.

“Indeed, there is a risk of no interest rate cut this year,” she said.

Read: Here is the expected petrol price for May

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