Rene Vollgraaff and Robert Brand

INVESTORS are betting that South African borrowing costs will climb further this year even though inflation may have peaked and economic growth remains anaemic.

Forward-rate agreements starting in six months, used to speculate on borrowing costs, signal another 32 basis points of rate increases this year, data compiled by Bloomberg show. One-year interest rate swops have risen 2 basis points since July 17, when the central bank last raised rates, to 6.3 percent. That compares with a 13 basis-point drop in emerging-market peer Poland.

The economy shrank an annualised 0.6 percent in the first quarter, the first contraction since the 2009 recession as a five-month strike at the biggest platinum mines hit output.

Statistics SA reported yesterday that consumer inflation slowed to 6.3 percent last month from 6.6 percent in June, lower than the 6.4 percent median estimate of 21 economists surveyed.

“Although we may see a lower inflation rate, it will still be above the 6 percent upper end of the Reserve Bank’s target range,” economist Jana van Deventer at ETM Analytics said on Monday. “That is why the market is not convinced that we have seen the end of the interest-rate hiking cycle.”

The difference in yield between five-year fixed-rate bonds and index-linked debt, a measure of investors’ price expectations, has narrowed by 20 basis points since last month’s rate increase, to 6.31 percentage points.

Reserve Bank governor Gill Marcus said at the time that inflation would peak at 6.6 percent in the fourth quarter of this year and stay outside the 3 percent to 6 percent target band until the second quarter of next year.

The inflation rate might already have reached its highest point in this cycle, Mamello Matikinca, a strategist at FirstRand’s Rand Merchant Bank unit, said. “We see inflation slowing to an average of 6.2 percent in the fourth quarter. There is a mismatch between that and what the Reserve Bank is expecting.”

Core inflation, which strips out fuel, food and electricity costs, accelerated to 5.7 percent in July, the highest level since January 2010.

Reserve Bank deputy governor Daniel Mminele said last week that inflation risks were elevated because of higher wage demands and a weaker rand. Economic growth would probably slow to 1.7 percent this year, which would be the weakest level since the 2009 recession, compared with 1.9 percent expansion last year, he said. – Bloomberg