Mike Cohen, Rene Vollgraaff and Amogelang Mbatha
INVESTORS are betting new Reserve Bank governor Lesetja Kganyago has little appetite to tighten monetary policy.
Bets on rates rising by a quarter point were pushed out to July from March, with the forward-rate agreement starting in eight months dropping seven basis points to 6.36 percent last week, after Kganyago kept borrowing costs unchanged in his debut policy meeting at the central bank’s helm.
The five-year break-even rate, which measures inflation expectations, slid to the lowest level in 18 months and below the 5.75 percent benchmark interest rate.
“It’s the first time in a long time that they say the risks are balanced,” Nazmeera Moola, an economist and strategist at Investec Asset Management, said from Cape Town last week.
“Unless there’s a major change in a key variable like the rand or oil prices then rates are likely to be on hold for the next few months.”
Plunging international oil prices helped keep inflation inside the central bank’s 3 percent to 6 percent target band for the past two months, warding off the need for higher rates. Policymakers forecast consumer price growth will average 5.3 percent next year, down from a previous estimate of 5.7 percent. That gives them room to support an economy estimated to grow 1.4 percent this year, the slowest pace since a recession in 2009. The price of Brent crude, the most used oil in South Africa, has fallen 30 percent since June.
“The governor was dealt a freebie by the oil price,” George Herman, the head of South African investments at Cape Town-based Citadel Wealth Management, which oversees more than R19.69 billion in assets, said. “It gives him an opportunity to get his hands firmly on our Reserve Bank and monetary policy before we enter the storm of US interest rate normalisation next year.”
Kganyago said in his first speech as governor that the bank’s monetary policy committee was committed to “normalising” rates.
The timing of future rate increases will depend on several factors, including inflation expectations, the state of the economy and the speed at which the US Federal Reserve raises borrowing costs.
Rising US rates might have an impact on the rand and capital flows, he said.
The rand strengthened 0.9 percent on Thursday, the best performer against the greenback among 16 major currencies monitored by Bloomberg. The yield on government bonds due in December 2026 fell two basis points to 7.70 percent, the lowest on a closing basis since October 2013.
“We should see a rate hike in the first half of next year,” Christie Viljoen, an economist at NKC Independent Economists, said. “We can’t stay at this level until the US starts to raise their rates. It will not be good for the rand if they don’t raise rates further.”
The rand has weakened 23 percent against the dollar since the start of last year.
The Reserve Bank increased the benchmark by 75 basis points in two steps this year, with the last a 25 basis point increment in July.
“Unless we see another sharp blow off in the rand, it’s likely that the flat-lining trend of interest rates will remain,” Sean McCalgan, a market analyst at ETM Analytics, said.
“The South African Reserve Bank will try to get away with small increments of rates if it is forced to show that it’s serious about containing inflation.” – Bloomberg