South Africa faces significant inflationary pressure due to the rising global oil prices – and the only way to combat it would be a much stronger rand, says Investec chief economist Annabel Bishop.<\/p>\n
The problem, however, is that the rand – which has already provided some relief to rising oil prices by recovering to its current levels – is unlikely to strengthen further without a massive rate hike from the South African Reserve Bank (SARB).<\/p>\n
April has seen the oil price climb from the low point in March of around US$73 a barrel to a reading of US$86 a barrel in recent days.<\/p>\n
Bishop noted that through the same period, the rand strengthened to R17.76\/USD from R18.50\/USD – but this was not enough to counteract the rising oil prices.<\/p>\n
“The jump in the oil price by close to US$15 a barrel has seen the rand oil price climb to R1,519 a barrel from R1,347 a barrel. Without the rand\u2019s recent strengthening, the rand oil price would be R1,578,” the economist noted.<\/p>\n
“Substantially greater strength in the rand is needed to counteract the recent sharp jump in the oil price, with an exchange rate of R15.90\/USD sufficient, and still weaker than the R14.50\/USD reached a year ago.”<\/p>\n
However, the rand is only likely to strengthen to R15.90\/USD if the SARB hikes by around 100bp and the US Fed does not move further<\/strong>, she said.<\/p>\n This is because South Africa’s current interest rate differential with the US hike cycle is still sitting at 50 basis points, with the SARB having hiked by 425bps since November 2021 and the US hiking by 475bps.<\/p>\n Markets responded well to the SARB’s recent 50bps hike, with investors pointing out that it makes South Africa’s money markets a very attractive destination for foreign investors.<\/p>\n Why is counting rising oil prices important?<\/strong><\/p>\n Bishop said that the jump in the rand oil price will place upwards pressure on CPI inflation globally and domestically, and will definitely be something factored into Central Bank decisions.<\/p>\n Oil prices have surged on news that the OPEC+ region will be cutting supply over the next few months, which came as a surprise to the market. The group said it will curtail oil output by around 1.16 million barrels per day.<\/p>\n In the first half of March, oil prices remained broadly in the US$80 to US$85 band. The second half of the month saw the price drop towards US$70\/bbl, prompting the announcement of quota cuts from OPEC+.<\/p>\n This is driving up prices for May, Bishop said, which will undoubtedly have an impact locally.<\/p>\n Both the SARB and the US Fed will make their next interest rate decisions in May – on May 25th and May 5th, respectively – so these prices will be key.<\/p>\n After the surprising hike of 50bps in March – when market consensus was eyeing 25bps – most economists and analysts expect the Reserve Bank to hold on rates for the rest of the year. However, some have warned that another rate hike could be on its way, given the SARB’s hawkish tone.<\/p>\n The SARB is particularly wary of inflation shocks, like the surprise jump in inflation in February, as well as rising core inflation. The central bank stressed that it will keep using its tools (rate hikes) to address its mandate, which is to keep inflation under control.<\/p>\n “With international oil prices unable to adjust to natural supply and demand dynamics, as OPEC+ adjusts quotas to keep prices elevated, there is an artificial upwards price pressure on inflation from this source, aiding inflation higher over the past year,” Bishop said.<\/p>\n “The relentless rise in CPI inflation on higher commodity prices last year has influenced other non-commodities\u2019 prices, leading to a broadening of price effects and higher core inflation.”<\/p>\n
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