Yields on South African bonds jumped to the highest level in 19 months yesterday as inflation accelerated more than estimated and the rand slipped to a six-week low before the release of minutes of the US Federal Reserve’s July meeting.
Statistics SA said yesterday that consumer price inflation rose to 6.3 percent in July from 5.5 percent in June, breaching the upper end of the central bank’s 3 percent to 6 percent target for the first time in 15 months. The median estimate in a survey of 22 economists was 6.2 percent.
“The impact of the inflation data is mainly on our bonds, which are coming under a lot of pressure,” Gareth Brickman, a market analyst at ETM Analytics, said. “The rand is weakening in line with emerging market currencies.”
The rand slid as much as 1.2 percent to R10.2782 a dollar yesterday, the weakest level since July 8. At 5pm the local unit was bid at R10.2327 against the dollar, 8.4c softer than its level on Tuesday.
The dollar firmed against units from the Turkish lira and Mexican peso to Thailand’s baht and Australia’s dollar. Yields on benchmark 10.5 percent government bonds due in December 2026 rose 8 basis points to 8.62 percent, the highest close since January 2012.
Risks to inflation “remain to the upside depending on currency weakness, petrol price hikes and wage adjustments”, Kevin Lings, the chief economist at Stanlib Asset Management, said. “The Reserve Bank is unlikely to consider cutting rates despite a weakening economy and instead will look to keep interest rates on hold for an extended period.”
The breach in the inflation target would be temporary with the rate averaging 5.9 percent in 2013, Reserve Bank governor Gill Marcus said on July 18 when announcing the benchmark repo rate would stay at 5 percent. The Reserve Bank forecasts the economy will grow 2 percent this year, which would be the slowest pace since the 2009 recession.
The Federal Open Market Committee was due to published its July meeting minutes later yesterday, containing clues on whether policymakers will start reducing their $85 billion of monthly bond purchases. The committee next gathers on September 17 and will probably decide to cut the purchases at that meeting, according to 65 percent of economists surveyed this month.
Foreigners bought a net R689m of local bonds on Tuesday, paring net outflows this month to R485m. – Bloomberg