South African consumers and businesses will, from tomorrow, endure another sharp increase in fuel prices, which is set to send living and production costs spiralling further and poses significant risks for inflation.
The looming price shock announced on Monday comes despite the government recently announcing it would extend its general fuel levy reduction for petrol and pause the tax on diesel altogether by another month to lessen the impact of the Middle East conflict on global oil prices.
South African Reserve Bank governor Lesetja Kganyago reiterated yesterday that the inflation outlook has turned more dire, denting the chances of interest rate cuts any time soon.
The retail price of petrol will jump by a hefty R3.27 a litre from tomorrow, while the wholesale cost of diesel will surge to R6.19.
Paraffin, which many poor households use for cooking and lighting — especially those in informal settlements with limited or no access to electricity — will now cost R4.22 per litre more.
Being a net oil importer, SA has been among the countries hardest-hit by the bloodbath on global markets since the US and Israel waged war against Iran on February 28, throttling the passage of 15%–20% of global oil supplies through the key Strait of Hormuz.
The knock-on effects of the fuel hikes will be widespread, placing additional strain on already under-pressure households and businesses, particularly in the transport, logistics, agriculture and small enterprise sectors, said Henry van der Merwe, chairperson of the South African Petroleum Retailers Association.
“Even with intervention on the levy side, the magnitude of these adjustments
“This raises concerns not only for consumers but also for the broader economic outlook, including the potential for further interest rate pressure in the months ahead.”
During a public lecture at Rhodes University yesterday, Kganyago said SA’s inflation headache could have been worse without the bank’s prudent policy stance, including the adoption last year of a lower 3% inflation target, after years of pursuing a 3%-6% band with a 4.5% midpoint.
He said the bank’s decision to tread cautiously in the face of concerning geopolitical developments in recent months, by steering clear of big and too-frequent cuts in its benchmark rate at its policy meetings, was now paying off.
“This meant our policy stance was not immediately rendered obsolete when trouble did come with the conflict in the Middle East and the closure of the Strait of Hormuz,” Kganyago said.
“We had inflation at exactly 3%, with core also at 3%, in line with our new target. This was a reasonably good starting point for confronting a severe shock.”
The well-established playbook for dealing with supply-side shocks in monetary policy was to look through the initial or first-round effects and rather focus on the second-round effects, he said.
“The oil price goes up, and then petrol and transport get more expensive. Monetary policy cannot do much about this. What is relevant for monetary policy is the period after the shock has passed,” he told his audience.
The problem is that inflation does not always fall when the shock passes.
— Lesetja Kganyago
“The problem is that inflation does not always fall when the shock passes. Instead, inflation can be persistently higher. This happens when the price shock broadens out into the economy: it is no longer just the one category, like fuel, that is more expensive, but everything.
“We call these second-round effects, and they tend to be most visible in inflation expectations and wages. For central banks facing a price shock, the key is to manage the second-round effects.”
Kganyago said, given the risks to inflation and the uncertainty around the Middle East conflict, in its next few meetings the bank would have to “make tough decisions about whether second-round effects are coming or whether we have enough space to look through”.
“If we do have to raise rates, it will be to sustain low and stable inflation, and all the benefits that brings,” said Kganyago. — Business Day
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