Rocketing fuel prices set to drive SA interest rates sharply higher

Economy ‘heading for a technical recession’ – economist Dawie Roodt.
The latest fuel price increases (for July) mean it will cost consumers almost R10-a-litre more for petrol than a year ago. Image: Bloomberg

South Africa’s rocketing fuel prices are set to result in interest rate hikes rising for the rest of this year, further hurting the disposable income of consumers and the country’s teetering economic growth.

This warning came from economists on Monday, following news of the latest fuel price hike for July, announced by the Department of Mineral Resources and Energy (DMRE).

Read: SA confirms fuel subsidy will end as prices jump 11%

Azar Jammine, chief economist at Econometrix, said the latest increase in the petrol price will certainly erode people’s disposable income and especially consumer spending.

“Through that, it will result in lower economic growth. The petrol price increase is inflationary and therefore interest rates will go up for the rest of the year,” he said.

Efficient Group chief economist Dawie Roodt believes the inflation rate will soon hit 7.5%, leaving the SA Reserve Bank with no option but to hike interest rates by at least 50 basis points later this month.

Technical recession

“The reality is that South Africa is heading for a technical recession,” he said.

This term is used when a country has two consecutive quarters of  negative economic growth.

The DMRE announced on Monday that from midnight on Tuesday, fuel prices will increase as follows:

  • 93 ULP and lead replacement (LRP) petrol will increase by R2.37 a litre.

  • 95 ULP and LRP petrol will increase by R2.57 a litre.

  • Diesel (0.05% sulphur) will increase by R2.31 a litre.

  • Diesel (0.005% sulphur) will increase by R2.30 a litre.

The department also confirmed the R1.50 temporary reduction in the general fuel levy that applied from April 2022 will reduce to 75 cents from 6 July 2022 and this temporary relief measure will be withdrawn from 3 August 2022.

Read: Temporary fuel levy relief will be withdrawn from August

The latest increases has led to further calls from both the Automobile Association (AA) and the Motor Industry Staff Association (Misa) for a review of the country’s fuel pricing methodology.

The AA said the latest fuel price increases announced by the government will hit already financially stretched consumers hard and put extra pressure on an already struggling economy.

It noted that the July petrol price adjustments will push the cost of 95 ULP petrol in Gauteng to R26.74 a litre and 93 ULP to R26.31 a litre, all new record-high prices.

The association said according to the data, the movement in international petroleum prices is the main driver behind the increases.

However, the AA highlighted that the value of the rand appreciated on average against the US dollar in June 2022, resulting in a saving of around 20c/l to the announced increases and without which the basic increases would be higher.

According to the AA, a major factor in the increase of the international petroleum prices remains the ongoing war in Ukraine, which is contributing to supply and demand pressures.

“As long as this conflict is unresolved, the increases to fuel prices – both in South Africa and other countries – remain likely,” it said.

It noted that the R1.50-a-litre relief through the general fuel levy, provided by government in May and June, will be halved for this week’s July fuel price adjustment. This added to the increases and means the increase of R1.82 to 95 ULP is effectively an increase of R2.57.

Fuel price interrogation

The AA said while pressure is building on the government to formulate a solution to rising fuel costs, short-term relief – while welcome – is not sustainable.

“We understand that government has little leeway in terms of international petroleum prices and the rand/US dollar exchange rate, which is why we have called, and will continue to press, for a review of the fuel price – an area where the government has control.

“There is a need to interrogate all the components of the fuel price to determine whether all these components are still necessary in the existing formula, and to establish if the current calculations of these components are correct. The longer this review is not initiated, the longer the country will wait for lasting solutions,” it added.

Misa CEO Martlé Keyter said there is no urgency from government to review the fuel pricing methodology to bring relief to motorists against soaring fuel prices.

She pointed out that the DMRE has not yet called a meeting of the committee which will be responsible for the task, although the department has confirmed it is busy formulating the criteria.

Keyter said the fuel price increases announced on Monday mean it will cost consumers almost R10-a-litre more than a year ago.

She added that the latest increases come six months after Finance Minister Enoch Godongwana announced in December last year that government will consider reforming the way the fuel price is calculated.

Read:
AgriSA calls on government to increase diesel rebate scheme
Parsing the pain at the pump

Godongwana made this announcement when the inland petrol price rose above R20-a-litre.

Keyter stressed that government wanted to review the fuel pricing methodology long before Russia’s war in Ukraine, which resulted in the skyrocketing of the Brent crude oil price.

“There is no time to waste… To make matters worse Eskom is plunging the country into unprecedented stages of blackouts, costing the crippled economy billions,” she said.

“The fuel price and Eskom combined has a devastating impact on every South African. We are bound to see inflation rising,” she added.

South Africa’s inflation rate increased to 6.5% in May 2022 from 5.9% in April 2022.

Read:
Kganyago says 50-point rate hike in July an option
SA consumer confidence plunges

Wayne Duvenage, CEO of the Organisation Undoing Tax Abuse (Outa), said it is disappointed that the fuel levy discount has not been extended.

“We note that government has not heeded the call for a continuation of the fuel levy reprieve at the full value of R1.50 per litre. Clearly the tax revenue shortfalls have negated government’s ability to continue with the relaxation in the fuel levy,” he noted.

“We are now paying the high price of weak economic policy that has given rise to the South African currency punching well below its potential, combined with high taxes and levies applied to petrol,” he said.

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Interest rates should have raised faster sooner.

Sorry, disagree.

They can make interest rate 20% and all that will happen is projects held back, jobs not created AND inflation even higher because of increased input cost. This inflation has nothing to do with asset price inflation or an overheating economy.

We can agree to disagree.

ok I’ll play along : why should interest rates have increased earlier?

Explain to us how increasing interest rates in a climate where externalities that drive cost increases beyond the ability of any local player to control, will reduce inflation? The only players that can control their margins in this game are the ones that anyway have regulated prices (Sasol) or the ones that have a natural cost advantage (local food producers)

End of comments.

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