Johannesburg - The rand’s slump to a record against the dollar has laid to rest any doubt traders were having about South African rate increases.
Forward-rate agreements, used to speculate on interest rates, are pricing in at least a 25 basis points rate increase at each of the next two policy meetings. Before the rand’s fall to 14 per dollar, the contracts predicted only a 50 percent probability of an increase next month.
South Africa’s currency tumbled the most since 2011 on Monday on concern lower prices for commodities, which account for more than half of the nation’s exports, will deepen as China’s economy slows. The rand led currency declines amid a selloff of emerging-market assets, with Chinese shares sinking by the most since 2007 and raw-material prices dropping to a 16- year low.
“They’ll probably be forced to hike interest rates just to keep the rand from weakening even further,” Ion de Vleeschauwer, chief currency dealer at Bidvest Bank, said by phone from Johannesburg. “It’s not good news for the local market because it’s going to put a massive damper on economic growth. ”
Forward-rate agreements starting in five months are now pricing in 50 basis points of rate hikes by the end of the year, compared with 35 basis points on Aug. 21. The rand traded 1.8 percent weaker at 13.2027 per dollar as of 11:29 a.m. in Johannesburg on Monday after falling as much as 8.5 percent to 14.07 per dollar earlier.
Repurchase rate
The Reserve Bank raised its benchmark repurchase rate by 25 basis points to 6 percent in July, the first policy move in a year, to help fight inflation which accelerated to 5 percent in last month. While Governor Lesetja Kganyago said in August 11 the current tightening cycle will be moderate, the central bank has repeatedly said the currency is the biggest risk to prices.
The five-year break-even rate, which measures expectations for consumer-price growth, climbed 22 basis points since the last rates decision on July 23, to 6.60 percent. The central bank targets inflation between 3 percent and 6 percent and will announce its next policy move on Sept. 23.
“The rand losses make a Reserve Bank September hike more likely,” John Cairns, a currency strategist at FirstRand’s Rand Merchant Bank unit in Johannesburg said in an e-mailed note. “They could even move 50 basis points.”
BLOOMBERG