What to expect from interest rates in South Africa after record petrol price hikes

 ·6 Sep 2023

Record diesel price hikes are likely to put upward pressure on inflation, economists say, adding risks to the interest rate outlook. However, the current forecast is that interest rates should still stay on hold for the rest of the year.

This is because the impact of higher fuel costs may not be as big as many think, and consumer prices should remain at relatively lower levels in 2023 and 2024 – compared to 2022 and the first half of 2023 – keeping interest rates down.

According to Stats SA, consumer price inflation dropped from 5.3% in June to 4.7% in July – the lowest reading since the 4.7% in August.

However, a massive petrol and diesel price hike from Wednesday (6 September) has unsettled the rosy outlook for the disinflation trend.

As a result, Investec Chief Economist Annabel Bishop said that inflation will likely rise to and remain above 5.0% for the rest of 2023.

However, this doesn’t reflect a complete turn, adding that the rate should move back to the South African Reserve Bank’s midpoint of 4.5% for most of 2024, with the potential to drop to 4.0% by the end of next year.

Because of this, the economist said that there are no interest rate hikes factored in for the rest of 2023, with the market’s forward rate already factoring in a cut from March 2024.

“We continue to believe the interest rate hike cycle in SA has ended and that next year will see some interest rate cuts. The risk to inflation both this year and next year is, however, likely to be to the upside in South Africa,” she said.

Inflation knock

Bishop said that despite fuel prices rising to record levels on Wednesday – and OPEC+ countries announcing that they would extend supply curbs through the end of the year – these factors do not have that much of a direct influence on inflation.

Petrol prices account for 3.5% of the CPI basket, while diesel prices only account for 1.4%, she said.

“The lower weighting of the diesel sub-component will have some moderating effect but still place upward pressure on the September CPI outcome,” she said.

August’s CPI data will also factor in medical costs from private hospitals and municipal rates and taxes, but food prices – the largest individual component of the CPI basket – will likely have a minimal impact in August.

South African prices could have also benefited from the decline in international agricultural commodity food prices, but the rand’s decline eliminated this benefit.

She said that headline inflation will likely climb upwards to 5% in August due to the base effects from August last year.

Investec has also predicted that inflation will hit 4.6% in 2024, as risks to food price inflation persist due to the El Nino weather pattern – which brings dry weather conditions to South Africa – and the costs of load shedding.

CPI inflation in 2023 is likely to come out below 6.0% – potentially below 5.8%, while inflation is expected to be closer to the 4.5% midpoint in 2025 and 2026, but there is still pressure that it could move back to 5.0%.

Read: Tables turn for businesses in South Africa

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