Get those bicycles out
[ECONOMIC COMMENT BY LUKE DOIG (pictured right), SENIOR ECONOMIST, CREDIT GUARANTEE INSURANCE CORPORATION]
Recall the old mantra of 'eight till late' for the exchange rate? Well now how about '9/11' for fuel prices.
Current petrol and diesel prices are R8,91 per litre and R9,38 per litre (wholesale) respectively, with under-recoveries currently standing at 23 cents per litre and 42 cents per litre. With oil prices again reaching record highs of $112 per barrel and no end in sight for the beleaguered dollar, such peaks for fuel prices may not be far off.
Further, if Eskom's electricity price increase request is granted, then double-digit inflation may become a reality. Certainly the R153 Government bond is indicating bearish times ahead as it nudges 10% for the first time since June 2004, echoing warnings from Governor Mboweni after the Monetary Policy Committee meeting on 10 April. In fact, businesses that are financing working capital out of borrowings or are allowing debtors days outstanding to stretch, are well advised to reconsider such approaches if indeed interest rates escalate even higher still. This is likely to send sequestrations and corporate failures soaring to their highest levels in five years in 2008.
Most confidence surveys paint a bleak picture, while expectations don't indicate any imminent recovery. In our opinion there is a 70% chance of another 50 basis points interest rate increase - taking prime to 15.5% - and an even chance of two additional hikes before year-end. This will obviously depend on future price developments, but the SA Reserve Bank is resolute in their endeavours to anchor inflation expectations, almost at any cost.
