Good news for petrol prices and interest rates in South Africa next month

Markets have calmed from a panic-induced sell-off last week, with the rand getting stronger and rising oil prices being generally contained.

This means that motorists are still lined up for more relief at the pumps in September, while the Reserve Bank should be primed to finally cut interest rates thanks to the US Fed’s almost certain start to a stateside cutting cycle.

According to the latest data from the Central Energy Fund, petrol and diesel prices are still looking ahead to cuts in September, though these have been reduced from around 84 cents per litre for petrol and 90 cents per litre for diesel to about 70 cents per litre for both.

The main contributor to the small downward shift is the oil price, which edged above $80 a barrel after rising almost 4% last week.

Oil prices are currently carrying a significant risk premium attached to geopolitical tensions after the assassination of a Hamas leader in Tehran, with traders keeping an eye on a possible response from Iran.

However, this is in the context of crude tracking a rebound in equity markets since sinking to a seven-month low early last week, with a dour outlook in China also weighing on sentiment.

Currently, at around $80 a barrel, oil prices are contributing to an 80 cents per litre over-recovery in local fuel prices, which benefits motorists. The rand, meanwhile, is undercutting this by around 10 cents per litre, given its weaker footing relative to July.

Along with other emerging markets last week, the rand took a beating as investors staged a mild panic over jobs numbers in the United States, stoking fears of a recession in the world’s biggest economy.

The shock numbers, which came in far below market expectations, led to a flurry of calls from investors and bankers to the US Fed to urgently cut interest rates. This was coupled with a sell-off of riskier assets, hitting the rand.

According to Investec chief economist Annabel Bishop, the start of the week has seen a calm return to markets, with a concomitant strengthening of the rand to around R18.25/$.

Bishop said that, while the rand remains volatile, this is to be expected given that it has always been a reactive currency. However, the local markets have shifted following the formation of the Government of National Unity, representing a fundamentally stronger position.

This was echoed by Old Mutual Wealth Investment Strategist Izak Odendaal, who noted that South African investments have held up relatively well.

“Usually, South African assets are “high beta” to global markets, meaning they fall by more in times of stress,” Odendaal said.

Odendaal said the rand is basically flat against the dollar in 2024, almost unheard of in a time of global market anxiety.

Bishop added that the worries of a US recession are also not considered the base case, but the slowing of the US economy opens the doors wide for an interest rate-cutting cycle to start in the US from September.

“The Fed is expected to cut by at least 25bp points at its next three FOMC meetings—in September, November and December—and then by 25bp at the four meetings in H1.25—January, March, May and June.

“This will take the drop in the Fed funds rate to 175bp by the end of the first half of 2025, with another 25bp cut then expected in July 2025, and then a further drop of 25bp by October 2025, completing a 2.0% cut.”

This, together with looming cuts by the Fed means the SA Reserve Bank should have the confidence to start lowering the repo rate at its next meeting.

Odendaal also noted that the relatively flat rand, together with looming cuts by the Fed means the South Africa Reserve Bank should have the confidence to start lowering the repo rate at its next meeting.

Current expectations are for the SARB to cut rates by 25 basis points in September and November, with a total of between 100-150 basis points cut by the middle of 2025, leaving the repo rate between 7.25% and 7.75%.

Read: Petrol price should be under R20 per litre in South Africa – here’s why