Will rising fuel prices force interest rate hike?

South Africans are concerned that we could be in for another interest rate hike next month. Picture: Anna Tarazevich/Pexels

South Africans are concerned that we could be in for another interest rate hike next month. Picture: Anna Tarazevich/Pexels

Published Aug 31, 2023


The looming petrol price increase is not expected to force an interest rate hike next month, even though it is likely to push the country’s inflation rate up.

There is still a good chance, at this stage, that the repo rate will remain stable at 8.25 percent – and the interest rate at 11.75 percent – following September’s Monetary Policy Committee meeting.

However, economists warn that a rate increase could loom if the Federal Reserve hikes interest rates further, or if inflation climbs more than is expected.

FNB believes that local interest rates have reached their peak and that a measured cutting cycle will emerge in the second half of 2024. That said, senior economist Siphamandla Mkhwanazi says the short-term prospects for this forecast carry an upside risk bias in that there could be a rate increase if the Fed hikes its funds rate further or if “inflation surprises to the upside”.

South Africa’s annual headline inflation dropped to 4.7 percent in July from 5.4 percent in June. This drop was largely due to a drop in transport inflation, thanks to lower fuel prices.

“In the medium term, we perceive the risk to lean toward the downside, where unexpected declines in the Fed funds rate or domestic inflation could prompt the SARB to implement rate cuts sooner than we currently project.”

With fuel prices the driver of lower inflation in July, and the lower inflation in June having an impact on the MPC’s decision to keep the repo rate steady that month, many people are surmising, therefore, that the interest rate will increase next month.

But despite unleaded petrol looking set to go up by almost R2 a litre and diesel increasing by close to R3 a litre, FNB senior economist Koketso Mano says the Bank does not expect the fuel price alone to force a resumption of the hiking cycle. The increase will push fuel out of deflation and should lift headline inflation back above 5 percent, though.

“However, at the July MPC, the SARB predicted Q3 2023 inflation of 5.4 percent which we now predict will rather be 5.0 percent. This is because inflation in July was lower than expected (across the spectrum of forecasts) and should assist in limiting the impact of this hike on average third quarter inflation.”

Therefore, without any other shocks, the SARB’s starting point will still be lower than previously anticipated. This will allow it to “rather be more concerned about the sustainability of inflation’s downturn in future – including the trend in the rand and international oil prices which have both slowed somewhat in recent days – and external factors”.

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