Rene Vollgraaff
INVESTORS are betting that interest rates will keep going up, undeterred by a manufacturing sector that is set for its longest slump in four-and-a-half years.
Forward rate agreements starting in six months, used to speculate on borrowing costs, signal another 42 basis points of rate rises this year, data show.
Manufacturing production, which makes up 15 percent of the nation’s economy, probably fell 1.6 percent in June from a year earlier in what would be the third consecutive monthly decline, according to a survey of economists before today’s report from Statistics SA.
While the market sees Reserve Bank governor Gill Marcus raising rates at least once more this year to quell inflation at a five-year high, rising borrowing costs threaten an economy struggling to shake off the effects of the longest mining strike in the country’s history. An index of economic activity slid to the lowest on record on Tuesday.
The HSBC/Markit Economics purchasing managers’ index for the economy as a whole fell to 46.4 points last month.
“The market is saying that despite the fact that we have weak growth we still have inflation,” Vivienne Taberer, who helps manage more than R150 billion in fixed income assets at Investec Asset Management, said on Tuesday.
“Investors are looking at the forecasts for inflation and how long” it would remain elevated, she said.
Marcus raised the benchmark repo rate by 25 basis points to 5.75 percent last month even as she cut South Africa’s growth forecast for this year to 1.7 percent from 2.1 percent.
Inflation, which was unchanged at 6.6 percent in June, would probably stay outside the central bank’s 3 percent to 6 percent target band until the second quarter of next year, the governor said.
“We expect another 25 basis-point hike this quarter,” David Faulkner, a Johannesburg-based economist at HSBC, said on Tuesday.
“While the economy is weak, the inflation risks are certainly pronounced.”
The difference in yield between five-year, fixed-rate bonds and inflation-linked debt, a measure of investor price expectations, has climbed 18 basis points from this year’s low on May 15 to 6.5 percentage points on Tuesday.
Brazil’s break-even rate rose 6 basis points in the period.
“Everything shows that there will definitely be more interest rate increases,” Ronel Oberholzer, an economist at Pretoria-based IHS Global Insight Southern Africa, said on Tuesday.
“The fact that the Reserve Bank increased rates by 25 basis points instead of 50 basis points shows that they are concerned about growth.”
Yields on benchmark rand bonds due in December 2026 rose 1 basis point to 8.33 percent by 10.13am yesterday.
At 5pm the rand was bid at R10.7399 to the dollar, less than 1c weaker from the same time on Tuesday. It has declined 7.7 percent in the past 12 months. – Bloomberg