JOHANNESBURG - The surge in oil prices is likely to see inflation inch up, firmly shutting the door on further monetary loosening by the Reserve Bank.  

Crude oil has spiked 19 percent this year, to prices unseen since late 2014.

Brent crude rose above $77 a barrel last week, for the first time in five years.

Maarten Ackerman, the chief economist at Citadel, said last week that higher oil prices coupled with a weaker currency would result in inflation drifting higher over the next 12 months.

“The question is whether it will breach the South African Reserve Bank upper target of 6 percent, in which case the SARB is likely to hike interest rates which might dampen potential economic growth,” Ackerman.

“Fortunately, inflation is currently closer to the bottom of the South African Reserve Bank target, and as such is unlikely to breach the upper target of 6 percent - assuming the oil price remains stable and the rand remains trading below R13 to the dollar.”

The World Bank in its April Commodity Markets Outlook said oil prices were forecast to average $65 a barrel over 2018, up from an average of $53 a barrel in 2017, on strong demand from consumers and restraint by oil producers.

Africa economist at Capital Economics John Ashbourne said the recent rise in oil prices would be a headwind for South Africa.

“We estimate that the increase in oil prices will cut South Africa’s income by about 0.1 percentage points of GDP over 2018 as a whole,” Ashbourne said.

“The effect on inflation will, however, be limited by the appreciation of the rand – which has slowed the rand-terms increase in oil prices. Even so, petrol prices will rise over the remainder of the year.”

Recent inflation developments have been generally favourably with headline consumer price index (CPI) inflation moderated to 3.8 percent in March, its lowest level since early 2011. 

Lesetja Kganyago, the governor of the SA Reserve Bank (SARB), said  last week that a combination of base effects and tax increases including the VAT4 and fuel levy increases was expected to confirm that the most recent reading was the low point of the current inflation cycle.

“Additional risks to many emerging-market assets stem from the recent rise in oil prices and international trade tensions. The recent increases were underpinned by Organization of the Petroleum Exporting Countries(OPEC’s) resolve to continue restraining supply in order to support prices,” Kganyago said.

The SARB’s most recent forecast was for inflation to average 4.9 percent this year, and 5.2 percent and 5.1 percent in the next two years, respectively.

Lara Hodes, an economist at Investec, said higher import costs generally lead to inflationary pressures as producers and retailers tend to pass on the additional costs to the consumer.

“Higher oil prices have a negative effect on oil-importing countries like SA, leading to a rise in the cost of production due to increased fuel costs,” Hodes said.