Perfect storm brewing for petrol price, repo rate shock | Fin24
 
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Perfect storm brewing for petrol price, repo rate shock

Apr 11 2017 13:26
Matthew le Cordeur

Cape Town – South Africans could see the petrol price rising by about 70 cents a litre next month with a further increase the following month, according to Stanlib chief economist Kevin Lings.

Reinforcing this view, Automobile Association (AA) spokesperson Layton Beard told Fin24 that a perfect storm will see the petrol price escalate - a drastic turnaround from its rosy situation last month.

Continued petrol price hikes and a prolonged deterioration of the rand will then see inflation rise, causing a repo rate hike, Lings warned on Tuesday.

The perfect storm is from a combination of:

  • A rising oil price (now at $53 a barrel), which was caused by rising tensions in Syria and North Korea; and
  • A 10% decline in the rand in the past two weeks, caused by President Jacob Zuma’s Cabinet reshuffle, which resulted in two rating agencies downgrading the country to non-investment grade.

“We were in a rosy position, but within a week it turned around... (and now there has been) a perfect storm in terms of the petrol price,” Beard told Fin24 on Tuesday.

He said the AA is predicting a “quite significant” petrol price increase in May, but said it would release its full mid-month report on Thursday.

Expect around 70c per litre increase - Lings

Lings said that the under-recovery of the petrol price increased drastically from 38c/litre at the start of April to 87c/litre currently.

The under-recovery is the amount consumers should pay on a daily basis to keep the petrol price at the right price. The average of this would then dictate how much the price of petrol would go up by.

“Unfortunately we are quite early in the month and the average tends to rise every day in any given month,” Lings said. “As such, we are currently looking at a 69c/litre increase next month.”  

That would take the price of inland petrol from R13.08/litre to R13.77/litre and coastal petrol from R12.81/litre to R13.50/litre.

If the rand deteriorates further and the oil price continues to rise, further petrol price hikes can be expected.

Standard & Poor's and Fitch Ratings downgraded South Africa’s sovereign rating to non-investment grade last week, raising fears that more rating downgrades will occur. The confluence of these downgrades could see investment decline drastically in the country, putting more pressure on the rand and inflation.

READ: SA bonds begin trading as junk for first time since 2000

From repo rate cut to hike

A higher petrol price will have an impact on inflation and repo rates going forward, said Lings.

Near-term inflation will rise due to the petrol price increase, while medium-term inflation will go up due to the deteriorating currency, said Lings.

“This wouldn’t have been factored in most people’s forecasts,” he said. “People were looking at a strong rand going forward.”

The monetary policy committee has kept the benchmark repurchase rate unchanged since last March after raising it by 200 basis points to 7% over two years, to try to bring price growth back to within its target band of 3% to 6%.

Inflation, which slowed to 6.3% in February, has been outside the target for six consecutive months and the central bank forecasts it will slow to less than 6% in the second quarter of the year.

READ: SARB worries about more rating actions, but limits scope for rate cuts

While the South African Reserve Bank (SARB) revealed in its semi-annual Monetary Policy Review on Monday that the scope for interest rate cuts is limited, Lings believes their insights might be outdated due to the drastic turnaround in South Africa’s currency in the past two weeks.

Lings said SARB will have to revise its forecasts, adding that any talk of a repo rate cut would disappear.

“One member (of SARB’s monetary policy committee) voted for a cut at the last meeting,” he said. “Had the currency remained strong, the SARB was moving towards a cut.”

Recent developments have therefore "taken away the interest rate cut option and replaced it with a warning that inflation will go up and interest rates will increase”.

Read Fin24's top stories trending on Twitter:

aa  |  stanlib  |  repo rate  |  petrol price  |  oil price
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