South African Reserve Bank governor Lesetja Kganyago. The Sarb already warned in March that the ongoing Middle East conflict is a clear instance of a supply shock, which raises prices while weakening demand.
Image: IOL | File
South African consumers could face a painful double blow in June as economists increasingly expect the South African Reserve Bank (Sarb) to raise interest rates while government phases out the R3-per-litre fuel levy relief that has temporarily cushioned motorists from surging global oil prices.
The Sarb’s Monetary Policy Committee (MPC) is widely expected to keep a hawkish stance on Thursday after inflation accelerated sharply to 4.0% in April from 3.1% in March, driven mainly by soaring fuel costs linked to the ongoing Middle East conflict.
Several economists now warn that inflation could climb closer to 5% in the coming months, increasing pressure on the Sarb to act pre-emptively to prevent higher prices from becoming entrenched in the economy.
The Sarb already warned in March that the ongoing Middle East conflict is a clear instance of a supply shock, which raises prices while weakening demand. The central bank said waiting for clear evidence risks leaving the policy response too late.
According to Nedbank economists Johannes (Matimba) Khosa and Nicky Weimar, the sharp jump in petrol and diesel prices has already started filtering through to broader transport and operating costs, pushing core inflation higher and increasing the risk of second-round inflation effects.
Nedbank acknowledged that the MPC has some space to wait and see how the global supply shock unfolds, as monetary policy remains moderately restrictive and the usual accelerants of spiking risk premia and significant rand weakness have not yet materialised.
“Despite these valid considerations, our analysis suggests that inflation expectations are particularly sensitive to petrol price increases, and we therefore see a relatively high risk of second-round effects,” they stated.
“As such, tightening monetary policy now would ensure that the inflationary consequences of the supply-side shock are temporary and likely minimise the need for more severe tightening later in the cycle.”
Nedbank expects the Sarb to raise the repo rate by 25 basis points to 7%, which would push the prime lending rate to 10.50%.
Adriaan Pask, chief investment officer at PSG Wealth, said the Sarb faces a difficult balancing act between protecting economic growth and defending its inflation credibility.
“Higher inflation expectations becoming embedded in wage demands, price-setting behaviour and investor sentiment” remained a major concern, Pask said.
He argued that while higher fuel and electricity prices were largely supply-side shocks that interest rates could not directly solve, the Sarb could not risk appearing complacent about inflation drifting away from its preferred 3% target.
“The more durable solution lies in reforms that reduce supply-side costs, improve productivity and give South Africa a stronger, more sustainable growth platform,” Pask said.
However, the prospect of another rate increase is likely to deepen pressure on already heavily indebted households.
Workers and consumers are simultaneously facing rising transport costs, electricity tariff increases and expensive food and credit costs, while economic growth remains sluggish.
The Congress of South African Trade Unions (Cosatu) urged the Sarb not to raise rates, warning that workers were already “drowning in debt”.
“The cause of the current rise in inflation is solely due to the war in the Middle East and not domestic demand,” said Matthew Parks, Cosatu's parliamentary coordinator. “A repo rate hike will further suffocate an economy on its knees.”
The labour federation also called on National Treasury to extend fuel levy relief introduced earlier this year to soften the blow from record fuel prices.
But economists warn that Treasury is instead preparing to gradually reintroduce the levy over June and July, which could offset any moderation in global oil prices.
While oil prices had eased slightly from April highs and have dipped below $100 per barrel, Treasury’s plan to phase in the remaining fuel levy would likely keep fuel prices elevated in coming months. That means consumers may not receive meaningful relief at the pumps even if international crude prices stabilise.
Izak Odendaal, an investment strategist at Old Mutual Wealth, said the markets were already pricing in at least two 25 basis-point increases over the next six months.
“The aim will be more about communicating the Sarb’s commitment to its 3% target than cooling an overheated economy,” Odendaal said.
He added that while tighter monetary policy would weaken economic growth, the increases were likely to remain relatively modest.
Citadel chief economist Maarten Ackerman said the inflation outlook had deteriorated significantly due to geopolitical tensions and surging oil prices, thus closing the window for any rate cuts.
Ackerman warned that rising oil prices were not the only concern, with higher transport, freight, fertiliser and food costs also threatening to intensify inflationary pressures.
“Our expectation at Citadel is that the Sarb will remain on hold at the next MPC meeting,” he said.
“While a hold in interest rates remains the base case, the balance of risks suggests that further rate increases cannot be ruled out if inflation or inflation expectations continue to rise, despite the mounting pressure this places on consumers and already-weak economic growth.”
BUSINESS REPORT