Risks to inflationary pressure heighten with fuel price hike

Last the ERB adjusted prices upwards was on 12 February this year. Brent prices are now 25% higher as the kwacha trades 22% weaker on negative sentiment

Risks to Zambia’s inflation have heightened as the copper producer effects a long overdue fuel price hike effective midnight of 02 October. In a statement by the Energy Regulation Board – ERB, prices will adjust petrol 16.85% higher to K16.06, diesel 21.98% to K14.65 and Kerosene 28.14% to K11.34 per liter.

Key drivers of the ERB’s decision were elevated Brent crude prices of USD84.7/bbl. (25% higher than February levels) in light of a 22% depreciated local currency ( kwacha) trading for K12.04/USD. Crude is forecasted to flirt with highs of USD100/bbl. in the not so far medium term, as Oil Producing and Exporting Countries – OPEC member states tighten supply to support prices.

The copper producer’s annual inflation for August broke the Bank of Zambia (BOZ) 6-8% target band at 8.1% and marginally paired losses in September when it printed at levels of 7.9% on account of base effects from the September 2017 25% electricity tariff hike. However, the real risks are anticipated in the lagged effects of the currency slide. The kwacha has lost 22% in value year to date as dollar demand soared in light of negative sentiment and a strong dollar environment.

The rise in pump prices is expected to cause a spiral cost push effect that will push inflation higher. Other risks to CPI include the projected lengthened dry season that is expected to adversely impact food prices.