Friday, January 21

Rising fuel costs increase South African inflation and growth risks

Inflationary pressures are increasing in South Africa following a series of increases in the price of fuel.

The Department of Mineral Resources and Energy announced Wednesday the ninth monthly jump in the regulated price of gasoline this year, bringing the total increase for 2021 to 40%. The country imports most of its fuel, which represents almost 5% of the inflation basket.

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Read: The ERDF Gasoline Price Mistake: December’s Increase Is Actually 75c / l

Annual consumer price growth was 5% in October, unchanged from the previous month and remaining above the 4.5% midpoint of the central bank’s target band in which it prefers to anchor inflation expectations.

The Reserve Bank raised its benchmark interest rate by 25 basis points on November 18, the first increase in three years, and its models indicate 12 more increases by the end of 2024.

Read: Driving inflation, the biggest risk in Sarb’s buyback rate decision

“We believe the risks to inflation over the next six months appear to be firmly biased to the upside,” said Jeff Schultz, senior economist at BNP Paribas South Africa, who is forecasting 100 basis points of rate increases in 2022. Key factors include the increase exogenous price pressures, which are already evident in local commodity prices, the impact of a weaker rand, expectations of tighter global monetary policy and border closures following the spread of the omicron variant of the coronavirus, he said.

Absa Group said Wednesday that it expects headline inflation to peak 5.6% in December, 10 basis points higher than its previous forecast, due to higher fuel prices. The measure is expected to relax toward the midpoint of the central bank’s target range in the second quarter of 2022, Absa economists, including Peter Worthington and Miyelani Maluleke, said in a note to clients.

BNP maintained its estimate of economic growth for 2022 at 1.8%, while noting that the risks were to the downside. That’s marginally more optimistic than the central bank’s 1.7% forecast.

“The growth momentum, which already appears to be stagnant, faces greater challenges next year due to possible additional restrictions related to the ‘stop-start’ pandemic and a return to structural rigidities as instability in electricity supply appears be increasing again, ”said Schultz.

Sebastien Alexanderson, CEO of National Debt Advisors, sees consumer spending under pressure as higher fuel costs drive up the cost of public transportation, food and other goods. Credit growth to the private sector slowed to 1.3% in October, and many people are tired of incurring additional debt.

“Most South Africans are already struggling to make ends meet,” Alexanderson said. “The most financially vulnerable people often live far from city centers and workplaces. This makes transportation costs a big part of their budgeted expenses. ”

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