JOHANNESBURG - South African forward markets cut projections of a rate hike on Wednesday, after inflation fell, as investors bet the central bank would hold rates unlike some emerging market countries that have tightened policy to support weakening currencies.
Brazil, Russia, Argentina and Turkey, dubbed the “BRATS” economies for their high budget and current account deficits and dependence on foreign capital flows, have all raised rates to stem a selloff that has dragged their currencies to record lows.
The rand is down nearly 20 percent against the dollar year-to-date, the worst performing currency after the Argentinian peso and the Turkish lira. Bonds have also seen a massive selloff, posting record outflows in June.
The rand was buoyed by data showing August inflation slowed to 4.9 percent year-on-year from 5.1 percent.
Africa’s most industrialised economy runs amongst the largest budget and current account deficits in EMs.
It funds that gap through volatile portfolio flows and public borrowing, both of which are at levels that have sparked warnings from ratings firms and are also susceptible to poor growth and high inflation.
However, investors on Wednesday put their money on rates remaining on hold in 2018, arguing the South African central bank would this week focus on the downward inflationary trend rather than protecting the rand and bonds.
“The hawkish impetus in the market has naturally been pared back, although the forward curve remains relatively elevated suggesting the market still has a relatively hawkish monetary policy outlook,” said Halen Bothma of ETM Analytics.
Spot money market rates fell further towards the bank’s 6.5 percent benchmark rate, and so did one and three-month forward rates after inflation for August slowed closer to the mid-point of the bank’s target range.
Rate agreements due in one month were pricing in a close to zero percent chance of higher rates at Thursday’s meeting.
In August, in response to the economy sliding to its first recession since 2009, the ruling African National Congress said the bank needed to do more to stimulate economic growth.
“The bank is going to have to perform a balancing act, especially with the governing party saying that now more than ever that fiscal and monetary policy will have to coordinate to make sure that South Africa isn’t pushed into stagflation,” said Bianca Botes, treasury manager at Peregrine Solutions.