High fuel prices risk another Reserve Bank interest rate hike

Absa recently said there are upside risks to its September headline consumer price index (CPI) inflation forecast due to high fuel prices, which could see the South African Reserve Bank (SARB) implement another interest rate hike. 

At its latest Monetary Policy Committee (MPC) meeting, the SARB elected to pause the interest rate hiking cycle that has been ongoing since November 2021.

This decision came in light of South Africa’s June CPI inflation reaching its lowest level in months and falling within the SARB’s target inflation range of 3% to 6%.

However, the MPC warned that this was merely a pause in the hiking cycle rather than the end, and it would remain dependent on data for future decisions.

“At the current repurchase rate level, policy is restrictive, consistent with elevated inflation expectations and the inflation outlook,” said SARB Governor Lesetja Kganyago.

“Serious upside risks to the inflation outlook remain. In light of these risks, the committee remains vigilant, and decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook.”

While June’s inflation reading was positive, many experts are concerned that this trend will be short-lived.

Absa recently revised its expectations for September’s headline CPI inflation from 5.2% year-on-year to 5.6% year-on-year. 

This revision came in light of data from the Central Energy Fund (CEF), which showed a large under-recovery of petrol and diesel prices in August.

The CEF’s fuel price recovery data showed a large average under-recovery of 142 cents/litre for petrol as of 15 August, while low-sulphur diesel had an even larger under-recovery of 262 cents/litre. 

The bank said these developments reflect a combination of the recent weakening in the country’s exchange rate and some push higher in international oil prices. 

Moreover, Absa’s energy and mining analyst notes that diesel crack spreads have risen as winter approaches in the Northern Hemisphere amid low inventories, explaining the bigger under-recovery in diesel prices. 

Given the weights of petrol and diesel in the CPI basket, fuel price hikes in line with current under-recovery rates would imply a sharp rise of 8.3% month-on-month in the CPI fuel price index in September.