A RARE bit of good news emerged this week amid all the doom and gloom about how credit rating downgrades will sign the death warrant of the South African economy.
Economists said that even a huge jump in petrol prices won’t fuel inflation, meaning that interest rates should also stay steady.
Analysts predicted this week that fuel prices would shoot up next month after the recent cabinet reshuffle, which saw the axing of Pravin Gordhan as finance minister and triggered a significant weakening in the rand/dollar exchange rate.
“The loss of confidence by investors, and the sovereign ratings downgrades by ratings agencies Fitch and S&P, have led to the rand slipping heavily against the US dollar, down from around R12.35 at the beginning of the month to its current position of around R13.40,” the Automobile Association (AA) said in a statement.
The AA forecast that petrol prices would increase by up to 55 cents a litre in May, diesel by around 39 cents a litre, and illuminating paraffin by an estimated 41 cents a litre.
But economists said higher fuel prices should not trouble inflation or interest rate prospects for now.
“We don’t think fuel price increases are enough to move inflation. It’s in line with what the Reserve Bank said they are expecting,” said Francois Conradie, head of research at NKC African Economics.
The Reserve Bank has raised concern about the rand’s sharp depreciation in the wake of last month’s cabinet shake-up.
But Conradie said the local currency would have to take “a big hit” before exchange rate became a serious threat to inflation.
Conradie said the Reserve Bank would be happy as long as inflation stayed around its current levels, which are slightly above the upper end of its 3 to 6% target range. Other data have also allayed fears about inflation.
For example, data released last week showed that retail sales had slumped for a second consecutive month in February.
Economist Dawie Roodt said he expected inflation to keep up the downward trend, which is some way off the 7% mark it hit in February last year.
“The next inflation number for March will probably be a bit lower due to a combination of factors, including base effects, the contribution of food prices, which have come down, and petrol prices, which also fell in March,” Roodt said.
The main drivers of inflation in recent months have been food and non-alcoholic beverages, health, transport, and miscellaneous goods and services.
Roodt said the weakening rand and higher fuel prices in May were negative factors for inflation, but he said those forces were neutralised by a drop in food prices and base effects, which occur when prices modulate after a spike such as happened last year when a prolonged drought stoked food inflation.
Roodt also did not expect any interest rate increase for the rest of 2017.
The Reserve Bank last month kept its benchmark repo rate unchanged at 7%, citing renewed risks to the exchange rate.
The bank also said it had reached the end of its interest rate hiking cycle, which has seen it raise rates by 200 basis points since 2014. – www.getbiz.co.za