South Africa’s electricity crisis to add materially to inflation

South Africa’s electricity crisis is expected to add materially to headline inflation this year, the central bank said.

The South African Reserve Bank forecasts power cuts will add 0.5 percentage points to the inflation rate as businesses pass on the costs of backup energy solutions to consumers, it said Tuesday in its six-monthly Monetary Policy Review.

Africa’s most-industrialized nation regularly faces as much as 12 hours of blackouts a day because state power utility Eskom cannot meet demand with its fleet of coal-fired plants.

The blackouts are curbing business operating hours, output and productivity, and to mitigate the impact, companies are spending increasing amounts on diesel to run generators.

The central bank estimates that power from a generator is 133% more costly than the energy provided by the municipal grid.

The bank has increased interest rates by 425 basis points since November 2021 to tame inflation that at 7.1% remains above the 4.5% midpoint of the target range at which policymakers prefer to anchor price-growth expectations.

The central bank also sees risks to inflation from food and core price growth that have yet to peak, in part reflecting the effect of a weaker rand.

The unit has weakened more than 7% against the dollar the year, making it the second worst performer in a basket of 16 major currencies tracked by Bloomberg.