Inflation was expected to hit at least 6 percent by the end of the year as the prices of petrol, electricity and water increased and the relief from the drop in the fuel price receded, economists said on Monday.
The forecast hike in interest rates in the second half of the year could add to the woes of the local economy.
The monetary policy committee of the Reserve Bank kept the interest rate unchanged at 5.75 percent last week, with the country’s inflation slowing down to 3.9 percent in February from 4.4 percent in January.
“It was a good six months as the petrol price came down by R4 a litre in total and that reduction was very meaningful. Consumers saw the benefits. Unfortunately a lot of that has now been eroded,” said Stanlib chief economist Kevin Lings.
The petrol price is expected to increase by R1.62 a litre from Wednesday.
Economists said the looming hike in the petrol price would erode all the benefits from the dramatic drop in the fuel price over the past six months.
Dawie Roodt, the chief economist at Efficient Group, said what was more concerning than the petrol price hike was the other price increases on the horizon, including the electricity tariff increase as well as food price increases following the poor maize crop due to drought.
Price hikes
Roodt said the only “good thing” was that demand in the economy was rather weak. “If we had demand that was a little bit stronger then the inflation impact would have been worse.”
Roodt said with all the expected price increases, inflation could rise up to 6 percent by the end of the year.
“It might even exceed 6 percent. If we see the rand going to R12.50 and the oil price increase, then we might even see inflation going above this.”
He said these factors might force the Reserve Bank to increase interest rates later in the year.
“This will not happen sooner though because there were other variables that the Bank will need to consider like inflation running flat and if the US raises their rates, then we might see some changes.”
He said it was good that the government was having wage talks with the unions now because if negotiations happened later with the inflation hike, then it would have impacted on the government’s fiscal.
Another view
Lings said the petrol price hike was a very significant increase in one month.
“This is going to put quite a significant amount of upward pressure on inflation.”
He said this meant that the low inflation number that South Africa had enjoyed would start turning around very quickly. He predicted that by the end of the year, inflation would reach about 6 percent.
“Once we get the April inflation rate, it would be closer to about 4.7 percent, which means we would have gone from about 3.9 percent up immediately to about 4.7 percent. By the end of year we will be above 6 percent and by the first quarter we might be closer to 7 percent.”
He said low inflation and the Reserve Bank holding back on interest rates hikes would start to change immediately and have a negative impact on ordinary consumers.