Good news about big petrol price cuts and interest rates

South Africa is set for big petrol price cuts in July despite the rand weakening slightly compared to May. This adds to the downward pressure on inflation and interest rates. 

A potential petrol price cut in July will follow a significant cut in June and is a welcome relief for South African motorists who experienced five consecutive fuel price hikes to start the year. 

At the beginning of June, all grades of fuel were slashed, with petrol dropping by R1.24 per litre and diesel cut by between R1.09 and R1.19 per litre. 

Data from the Central Energy Fund (CEF) shows that this could be repeated in July, with a forecasted cut of over R1 for both grades of petrol and a smaller cut of over 30 cents for diesel. 

The expected decreases in the price of the fuels are listed below –

• Petrol 93 – a decrease of R1.10 per litre
• Petrol 95 – a decrease of R1.04 per litre
• Diesel 0.05% – a decrease of 36 cents per litre
• Diesel 0.005% – a decrease of 31 cents per litre

However, while these cuts are welcome, they are lower than initially expected as the rand has retreated from its strong start to the month. 

Despite briefly breaking below R18 to the dollar, the currency’s average value throughout the month was higher than that experienced during May. 

This may change as financial markets continue to react positively to forming a Government of National Unity. 

Oil, the other main driver of fuel prices, is headed for the first back-to-back weekly gain since early April as demand picks up in the US. 

Brent crude, which held above $85 a barrel, has risen more than 3% this week, while WTI traded near $81. Consumption of products like gasoline, diesel and jet fuel showed signs of improving.

US banks, including Goldman Sachs, expect global oil consumption to run ahead of supply, pulling stockpiles lower and supporting prices. 

This may result in a slightly smaller cut to the prices of petrol and diesel at the beginning of July and potentially higher prices throughout the year. 

Inflation’s saving grace 

Stats SA announced earlier this week that South Africa’s headline inflation rate remained unchanged in May. Fuel prices played a major role in keeping the price of goods elevated. 

The price of fuel is a major driver of inflation in South Africa. It is a universal input in the economy and is increasingly important given the deterioration of the country’s railways. 

Around 85% of all the goods moved through and around South Africa are transported via road at some point, meaning that fuel prices affect the cost of nearly everything in South Africa. 

Transport inflation tracked by Stats SA rose to 6.3% in May, the highest rate for the category since 7.4% in October last year. 

The organisation said fuel was the major culprit, with petrol and diesel prices increasing on average by 9.3% on a one-year basis and by 0.6% since April.

Rising fuel prices hurt consumers most when purchasing basic goods such as food and beverages. As such, high fuel prices also kept food inflation elevated. 

Old Mutual chief economist Johann Els said that despite this, South Africa’s inflation is firmly on the downward trend, and interest rate cuts are on the horizon. 

While petrol price increases have kept overall inflation high, inflation in other consumer goods has eased substantially.

Over the past few months, the weighted average inflation for consumer goods such as clothing, footwear, furniture, appliances, and vehicles declined from 4.2% to 3.5%.

Contrary to intuition, Els said that elevated petrol prices, having risen over 50% in the past two years, have a deflationary effect. 

Higher petrol prices limit consumers’ disposable income, reducing their spending on other goods and reducing upward pressure on the prices of those goods. 

Els said the Reserve Bank has likely already considered cutting interest rates, but this was delayed by the country’s elections and potential volatility in financial markets. 

Successive petrol price cuts in June and July will further add to the downward pressure on inflation and interest rates.