The oil price, which has hit record levels in the past few days, is unlikely to lead to an immediate increase in the interest rate, an Absa economist said on Monday.
John Loos said although an oil shock would probably introduce higher inflation, a stable interest-rate policy could steer South Africa well clear of the recessionary conditions that the world’s large economies might experience.
Oil prices, which are 46% higher than a year ago, have risen nearly $10 a barrel over the past three weeks.
On Friday, light sweet crude for delivery in September reached $67,10 — the highest point since it was first traded in 1983.
The price of Brent North Sea crude oil for delivery in September reached a record high of $66,77 on Friday.
”While an oil shock will probably introduce higher inflation to South Africa and lower economic growth, a stable interest-rate policy through the rising price stage, followed by interest-rate cuts thereafter, could see South Africa steering well clear of the recessionary conditions that the world’s large economies might experience,” Loos said.
With the higher oil price, the overall inflation trend is expected to remain out of the South African Reserve Bank’s (SARB) inflation target — between 3% and 6% — for an extended period.
”Under these circumstances, if the overall inflation trend is expected to remain out of the target for an extended period of time, the MPC [the SARB’s monetary policy committee] will be expected to react,” Loos said.
”However, if the expectations are that the inflation rate will return to the target range within a short period of time, then the MPC will not necessarily react.”
A further consideration for the SARB would be rand movements.
Loos said the United States Federal Reserve has applied a highly accommodative interest-rate policy during times of oil-price shocks.
”This means that an oil-price shock could bring about an end to US interest-rate hikes earlier than would otherwise be the case, and as soon as the shock had abated, the Fed could actually begin to lower interest rates quite quickly,” Loos said.
”Given the dollar’s current dependence on rising US interest rates and strong US economic growth [to attract the foreign capital inflows needed to finance the country’s gaping current account deficit] for support, I believe that an oil-price shock may bring about significant dollar weakening.”
Loos said this weakening trend could become more severe in the after-shock period when oil prices are falling and the Fed starts cutting rates.
”The oil shock will surely increase South Africa’s currency volatility, as well as the volatility of the different final demand components that will need to take turns in supporting overall economic growth.”
With a weak dollar period generally being a strong rand period, the impact of oil prices on domestic inflation could be muted by the rand’s performance, and a strong downward move in inflationary pressures could be introduced as oil prices fall.
”At that stage, it is even possible that the SARB would lower interest rates, with the domestic consumer playing an important role in supporting economic growth,” Loos said. — Sapa