The rand’s rally is giving Reserve Bank governor Gill Marcus room to pause in raising interest rates as investors reduce inflation bets.

The yield gap between fixed-rate debt due in five years and similar-maturity inflation-linked bonds, a measure of investors’ price expectations, has narrowed 40 basis points since the central bank’s surprise rate increase on January 29. Brazil’s break-even rate was unchanged in the period. The rand has climbed 5 percent against the dollar since then, the biggest gain among 16 major currencies tracked after the real.

Seventeen of the 22 economists surveyed predict the monetary policy committee (MPC) will keep the benchmark repo rate at 5.5 percent today, with the rest forecasting increases of between 25 basis points and 50 basis points.

Marcus tempered market expectations this month that policymakers would take aggressive action to control inflation, enabling her to take a more gradual approach that is supportive of the economy.

“It is quite a close call and it’s principally because the rand has pulled back, which probably gives the Reserve Bank some scope to delay further rate hikes,” Adenaan Hardien, the chief economist at Cadiz Asset Management, said on Monday. “Rates will go up at some point but when is the big unknown.”

Core inflation

Forward-rate agreements starting in two months, used to lock in borrowing costs, climbed 9 basis points from the last MPC meeting to 6.17 percent on Tuesday, signalling traders are pricing in half a percentage point increase by May.

Consumer inflation accelerated to 5.9 percent last month, remaining within the central bank’s 3 percent to 6 percent target for a fifth consecutive month. The core inflation rate, which excludes food, non-alcoholic beverages, petrol and energy costs, has stayed at 5.3 percent since September last year.

Local policymakers may follow counterparts in emerging markets, such as Turkey and India, that are pausing after tightening monetary policy in January to help bolster their currencies. Turkey’s central bank kept its three benchmark interest rates unchanged on March 18, while the Reserve Bank of India will probably leave its repurchase rate unchanged at 8 percent on April 1, according to 22 of the 23 analysts surveyed.

Marcus said on March 13 that policymakers would not necessarily adjust the interest rate every time it met and that if rates did rise, the increases might not be the same magnitude. The following day, she said some analysts’ forecasts that the key lending rate would rise by another 200 basis points in the coming year were overdone.

“They will either skip increasing rates this month or raise them by 25 basis points,” Johann Els, an economist at Old Mutual Investment Group South Africa, said from Cape Town. “It’s 50-50. Inflation is still well contained.”


The rand plunged 22 percent against the dollar last year and slumped 5.7 percent in January, adding to pressure on inflation and prompting the MPC to raise the benchmark rate for the first time in more than five years. The currency gained 9.85c to be bid at R10.6786 a dollar at 5pm yesterday.

In January, the central bank said inflation would probably breach the top of the target in the second quarter and peak at 6.6 percent in the final three months of the year.

In the Budget released on February 26, the Treasury forecast inflation would average 6.2 percent this year.

“We still see some risk to inflation despite the resilience of the rand through February,” Sean McCalgan, the head of real-time research at ETM Analytics, said on Monday, predicting a 25 basis-point increase. The central bank “may be forced to hike if its inflation forecasts haven’t come down far enough from where they were sitting in January”.

While the primary mandate is to contain inflation, policymakers also take into account the impact of their decisions on growth and employment.

The jobless rate is 24 percent and the economy expanded 1.9 percent last year, the slowest pace since the 2009 recession. The Treasury is forecasting growth of 2.7 percent this year.

“Further interest rate hikes will suppress economic activity and real job creation,” Investec economist Annabel Bishop said in a note on Monday, predicting a pause in rate hikes this month. – Bloomberg