It might be prudent not to take out a big loan to buy a new car with a powerful (and thirsty) engine right now – few economists disagree with the broad view that interest rates are set to increase and petrol prices to rise even further from the current high levels.
“The SA Reserve Bank [Sarb] is likely to hike interest rates at every monetary policy committee [MPC] meeting next year,” says Nolan Wapenaar, one of the chief investment officers at Anchor Capital.
He warns that increasing oil prices are creating “massive inflation pressures” in SA and that inflation could breach 6% if recent trends are anything to go by.
The latest figures from Statistics SA show that inflation increased to 5% in September after increasing to 4.9% August. This is significantly higher than the average inflation rate of 3.3% in 2020.
Wapenaar told a diverse audience in a presentation outlining the potential for bonds recently that one of the big reasons for the increase in the oil price is higher demand from China as the huge country is switching back to its older power stations that use oil and coal, and relying less on its more modern natural gas power stations.
“Natural gas became too expensive to use. The global supply is not enough, especially with winter starting in the northern hemisphere. There is a critical shortage of natural gas and prices spiked up,” says Wapenaar.
He warns that motorists can expect very steep petrol prices following the increase in oil prices to around $85 per barrel. “The petrol price is expected to increase by around R1 per litre beginning November.
“Prepare to pay R20 per litre very soon,” says Wapenaar.
Momentum’s macroeconomic research team highlighted in its recent research note how higher transport costs are expected to drive near-term inflation.
The group’s economist Sanisha Packirisamy, and head of investment research and asset allocation at Momentum Investments Herman van Papendorp, said that while headline inflation of 5% in September was in line with forecasts and had little effect on financial markets, rising fuel prices are likely to filter through to higher consumer prices in the coming months.
“Fuel inflation rose 19.9% year-on-year after factoring in an increase of 4 cents per litre (95 octane petrol inland), but is expected to rise further towards year-end on higher international oil prices amid a global energy crunch.
“Although higher fuel costs should drive inflation higher in the near term, services constitute around half of SA’s inflation basket and lower price pressures in this component of the basket (including medical aid tariffs and rental inflation) will likely continue to provide an anchor for headline inflation in 2022,” they say, alluding to the fact that fuel and other transport costs have a very low weighting in the consumer price index.
The economists at FNB feel the same, pointing out that the benchmark Brent crude oil prices reached a monthly average low of under $30 per barrel in April 2020, before rising to over $75 per barrel in September 2021, with recent daily quotes currently above $85 per barrel.
“It is expected that rising demand amid slow-adjusting supply could keep oil prices elevated in the near term,” says FNB economist Siphamandla Mkhwanazi.
“The rand has depreciated since mid-year, driven by expectations that the Fed will taper asset purchases in November, following elevated inflationary pressures, which added to risk associated with emerging market assets.
“These developments suggest that fuel prices will be elevated going into 2022. As it stands, the Department of Energy’s half-month fuel price developments showed that we may have a R1 per litre fuel price hike in November,” says Mkhwanazi.
In addition, electricity inflation has returned to double digits – currently at 14% from 6.2%.
“Here lies another source of risk. Eskom and Nersa [the National Energy Regulator of SA] are in dispute about the initiation of a new Multi-Year Price Determination process, which is needed to determine the tariff for the 2022/23 financial year by the middle of March 2022, in time for the new fiscal year and direct-user price adjustment,” notes Mkhwanazi.
“However, this is unlikely to be achieved and adds uncertainty to the electricity inflation outlook. We currently have 11.6% priced in for the municipal survey in July 2022, in line with the continued liquidation of amounts from Eskom’s successful court disputes last year.
“Fuel and electricity inflation present the greatest source of upward inflationary risk as they spill over to the cost of producing and distributing goods as well as providing services,” says Mkhwanazi.
FNB expects inflation to increase for the next few years.
“In line with a gradual recovery in demand, we project headline inflation to rise from an average of 3.3% in 2020 to 4.5% in 2021, 4.3% in 2022 and 4.5% in 2023,” according to a recent research note, warning that there is risk that inflation could be higher than this forecast if supply bottlenecks persist and transportation costs increase more than expected.
“Headline inflation could rise toward 6% in 2022, and likely remain above the 4.5% target in 2023. This could trigger a tighter-than-expected monetary policy response,” says Mkhwanazi, although FNB is cautious about predicting an interest rate increase at the final MPC meeting this year.
Packirisamy says the view at Momentum is that current inflation figures and longer-dated inflation expectations (which remain close to the midpoint of the target band) could allow the Reserve Bank to stave off interest rate hikes until the first quarter of 2022, particularly as tapering by the US Federal Reserve has likely already been partly priced in by markets.
“While we cannot rule out the risk of a November hike (should the Sarb opt to normalise interest rates pre-emptively to prevent a de-anchoring in inflation expectations), the Sarb may also be discouraged to raise interest rates too early given the potential negative effect on sentiment and cyclical growth outcomes,” she says.
Wapenaar says Anchor Capital is of the view that the international bond markets have already priced in the start of governments around the world reducing their programmes of fiscal and monetary stimulus.
“Bond rates have increased, similar to when tapering of bond repurchases started in 2013 after the 2008 crisis,” he points out.
He says that interest rates are due to “normalise” in SA too.
“The situation was strange with a lockdown that limited economic activity on the one side and stimulus to get the economy going on the other,” says Wapenaar.
In SA, the prime interest rate fell to the current 7%, from 10% in the middle of 2019. The Sarb reduced the repo rate cautiously in the last quarter of 2019 when economic growth started to falter, and then aggressively when Covid-19 hit.
Expectations are clear that the tide is turning.
Listen to Simon Brown interviewing Dr Adrian Saville from Genera Capital about his inflation views (or read the transcript here):