Jump? Marcus won’t say how high

Published Mar 18, 2014

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Johannesburg - Reserve Bank governor Gill Marcus is debating with the market over how high is high.

Traders are speculating the central bank will raise interest rates by 188 basis points over the next 12 months, paring their bets by 13 basis points since Marcus said late on Thursday last week that some investor forecasts for borrowing costs were overdone.

Just three months ago, investors were predicting rates would stay unchanged in the first half of this year.

But when Marcus unexpectedly raised the repo rate by 50 basis points in January, the market’s initial reaction was to expect an increase of 200 basis points in the year ahead.

Marcus said last week that the market reaction to the move was extreme.

“I don’t think she wants the market to get carried away,” Vivienne Taberer, a fixed-income portfolio manager at Investec Asset Management, said on Friday. “She has been relatively successful, especially given that the rand has come back somewhat.”

Forward rate agreements, which are used to lock in borrowing costs over the next 12 months, dropped 71 basis points since January 31, two days after the interest rate decision, to 7.38 percent on Friday. This compares with a 31 basis point drop to 3.01 percent for Poland.

Marcus said on Thursday that there would not necessarily be adjustments of the interest rate at every monetary policy committee meeting or that if rates did rise, the rise might not be of the same magnitude.

“I thought that the market expectation of a further 200 basis points increase over the coming year sounded overdone, and I still believe this to be the case,” she said.

The next rates decision is due on March 27.

The economy is struggling to gain momentum because of strikes, an almost 10 percent jump in the fuel price over the past year and limited electricity capacity. This has deepened the dilemma for Marcus.

“I fail to understand why the forward market priced in such a big increase in interest rates considering the country’s macroeconomic backdrop, particularly the fragile state of consumers in general,” Wikus Furstenberg, a portfolio manager at Futuregrowth Asset Management, said. “What Marcus has said makes sense and it makes sense that the market pulled back a little.”

The yield on the R186 bond, due in December 2026, fell 2 basis points to 8.53 percent on Friday. At 5pm on Friday the rand was bid at R10.7519 to the dollar, less than 1c lower than at the same time on Thursday.

Taberer said the central bank could temper future rate increases given the rand’s 5 percent gain since the previous monetary policy meeting.

“We think there probably is a modest hiking cycle, but they could well decide to increase by 25 basis points or keep it on hold,” she said. “We think it’s going to be modest whatever they do.” – Bloomberg

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