Johannesburg - Will inflation slow quickly enough to keep South Africa’s central bank from raising interest rates next month?
Bond traders are betting yes, sending yields on benchmark government securities due December 2026 down 24 basis points in the past month, the sixth-biggest decline among 24 emerging markets tracked by Bloomberg indexes.
Investor inflation expectations are also falling amid a decline in oil, with the difference in yield between five-year fixed-rate debt and similar-maturity index-linked bonds falling almost a half percentage point since reaching a two-month high in July.
Yet consumer-price growth probably was 6.1 percent last month, higher than policy makers’ 3 percent to 6 percent band, according to the median estimate in a survey of economists by Bloomberg before the report in two days.
That would be the sixth straight month above target, and with the rand down 12 percent over the past year, central bank Governor-designate Lesetja Kganyago may act to combat what he has said is the currency’s role in the “sustained rise in inflation since mid-2013.”
“Another interest-rate increase is not a given,” Jana van Deventer, an economist at ETM Analytics in Johannesburg, said by phone on October 17.
“If we don’t have pressures from global markets to raise interest rates, it could provide room for the South African Reserve Bank to keep rates relatively low for longer.”
Slowest Pace
The central bank raised its benchmark repurchase rate by 75 basis points to 5.75 percent this year as a weak rand fuelled consumer prices even as the economy is set to expand at the slowest pace since the 2009 recession.
The next interest-rate announcement is on November 20.
One-year interest-rate swaps fell six basis points since the last decision on September 18, when the central bank left rates unchanged.
South African interest rates are negative once inflation is taken into account, a situation that isn’t desirable over the longer term, Reserve Bank Deputy Governor Daniel Mminele said on October 9.
“If they want to normalise rates, the sooner the better,” Abri du Plessis, who helps manage 4.5 billion rand at Gryphon Asset Management in Cape Town, said by phone on October 17.
But with the expected positive effect from oil and fuel prices on inflation “it may be that they will wait and see and postpone further rate hikes,” he said.
‘Fast Decreasing’
The currency strengthened 0.3 percent to 11.0427 per dollar at 2:31 pm in Johannesburg.
The price of gasoline, which contributes 5.7 percentage points to the inflation basket, has decreased 5 percent since reaching a record high in April.
Brent, the most-used oil in South Africa, declined 25 percent since June 24.
Inflation in the next few months will depend on whether the oil price stays at current levels and drags down domestic pump costs, Elna Moolman, an economist at Macquarie, said by phone from Johannesburg on October 17.
A drop in fuel prices “helps inflation to slow quickly,” she said.
“Our official view is still that they will raise rate by 25 basis points, but I think the probability of an interest rate hike is fast decreasing.” - Bloomberg News