Lower oil price, costlier power will work on inflation this year
The South African Reserve Bank (SARB) is expected to keep rates on hold this week after the fuel price fell in December, giving consumers a temporary reprieve. But the relief could be short-lived, with electricity prices set to rise sharply this year. Lower fuel prices, which dropped again this month, helped to moderate inflation in December, with the outlook for inflation now remaining tame for the rest of the year. Fuel prices fell as the international oil price plunged to its lowest levels in more than a year. Crude oil averaged $56.55 in December after breaching $80 earlier last year. Absa economist Miyelani Maluleke said this week: "We expect the SARB to hold, given the sharp drop in Brent crude oil prices and the well-behaved exchange rate."The volatile rand strengthened slightly this month on improved global appetite for riskier assets and short-lived dollar weakness. But while lower fuel prices may have tempered inflation, it is expected to deviate slightly from the midpoint of the Reserve Bank's target range of 3%-6%. The Bank's primary mandate is to contain inflation. But in 2020 inflation is expected to rise following higher electricity prices later this year and base effects of low inflation in 2019. Annabel Bishop, Investec chief economist, said inflation of 4.4% year on year was forecast for December 2018, and 4% for this month, down from November's 5.2% year on year. Stats SA will release official inflation figures for December on January 23. Given that an electricity price hike will stoke inflation later this year, economists have forecast interest rates to rise from July - for the first time since rates were hiked by 25 basis points in November last year. Said Bishop: "With CPI [consumer price index] inflation likely to be closer to 5.6% in 2020, an interest rate increase [of 25 basis points in the second half of 2019] is possible for SA." Thereafter Investec expects rates to be held for the rest of the year. Mpho Tsebe, an economist at Rand Merchant Bank who also forecast a hike later this year, said in addition to monitoring the impact of higher electricity prices - expected to be in the double digits - the Bank will also closely watch food prices, which may rise as insufficient rain for the 2018/2019 planting season could result in crop shortages.But Tsebe said: "At the moment we're not too worried about food prices because of the ample supply that we had [following the bumper harvest in 2017]. But food prices are going to be a little higher than what they were in 2018." Should the Bank hike rates this year, it would come at a time when economic activity is forecast to remain weak. The World Bank this week estimated growth of 0.9% for 2018 and 1.3% for 2019 for SA. Aside from domestic factors, global financial conditions will also weigh on the Bank's interest rate decisions. US interest rates may rise twice this year, although new data indicating a slowdown in the US economy may result in the Federal Reserve pressing the pause button on its hiking cycle. A pause "would be key because it will give the SARB some breathing room - the dollar would weaken and the rand would gain on that, which would be positive for inflation", said Tsebe.Oil prices may also rebound to $70 per barrel as US sanctions on Iran oil exports kick in later this year.