`World Cup Effect' May Push South African Interest Rate Cut Into September
South African Reserve Bank Governor Gill Marcus may hold off on making the eigth interest rate reduction since December 2008. Source: South African Reserve Bank via Bloomberg
South African Reserve Bank Governor Gill Marcus probably will resist calls this week from labor unions and exporters to cut interest rates to prevent a rebound in inflation. Investors are betting she’ll give way by year-end.
Policy makers will leave the benchmark rate at 6.5 percent on July 22, according to 18 out of 26 economists surveyed by Bloomberg. Traders are speculating the rate will drop later this year: Bond yields have fallen as much as 43 basis points since the end of June and money-market futures slumped to record lows.
Marcus may hold off on making the eighth interest rate reduction since December 2008 after the soccer World Cup, which ended on July 11, fueled price increases and enabled workers to push for higher wages. A faltering economic recovery may prompt her to change tack in September, forward rate agreements show, making South Africa the only Group of 20 nation where paring rates is still an option.
“There’s not enough evidence in the economic data to back a cut at this meeting,” Esther Law, an emerging-market rates strategist at Societe Generale in London, said in a phone interview. “The World Cup effect on growth and inflation isn’t clear yet and there’s also wage increases to consider. The market is definitely pricing in the risk of further cuts going forward.”
Inflation in Africa’s biggest economy has slowed for 14 of the past 15 months, reaching 4.6 percent in May and giving the Reserve Bank scope to reduce its key rate by 5.5 percentage points since December 2008. The bank left the rate unchanged on May 13 as South Africa’s economy began to recover from last year’s 1.8 percent contraction.
‘Hesitant, Fragile and Uneven’
The European debt crisis has weakened the outlook for manufacturing and growth. The purchasing managers’ index fell below 50 for the first time in eight months in June, indicating shrinkage in factory output, Kagiso Securities Ltd. said on July 1. Europe accounts for almost a third of South African exports.
“The recovery is taking place, but it is hesitant, fragile and uneven,” Marcus said in a speech in Johannesburg on July 7. “Its sustainability will be dependent on the global recovery in general and in Europe in particular.”
Money market investors are pricing in a more than 50 percent chance that policy makers will lower the key rate by half a point on Sept. 9, compared with a 20 percent chance of a cut this week, said George Glynos, managing director of Econometrix Treasury Management, a fixed income advisory in Johannesburg.
The cost of three-month forward-rate agreements slumped to a record low of 6.21 percent today, almost 32 basis points below the Johannesburg interbank agreed rate. That’s the lowest so- called FRA rate for cash contracts due in three months since the central bank first introduced its repurchase rate in 1999.
Odd One Out
A rate cut would make South Africa the exception among G-20 peers such as Australia, Brazil, Canada and India, which have raised interest rates this year, and the U.S., U.K. and the 16 nations sharing the euro, which have kept rates close to zero. Russia, which dropped its key rate by a quarter point to 7.75 percent on June 1, said on June 30 that interest rates will probably remain unchanged “in the coming months.”
Policy makers in South Africa, the fourth-poorest of the G- 20 nations based on per-capita income, confront an economy that shed 171,000 jobs in the first quarter, adding to the 870,000 lost last year. The nation’s unemployment rate of 25.2 percent is the highest of 62 countries tracked by Bloomberg.
Finance Minister Pravin Gordhan said on July 8 that economic growth moderated in the second quarter, after reaching an annualized 4.6 percent in the first three months of the year. While conditions are improving for consumers, “many South Africans are still facing hardships,” he said.
Inflation
Rising wage and electricity costs may dissuade Marcus from cutting interest rates this week. Labor unions won wage increases of as much as 11 percent this year, almost double the central bank’s inflation target.
“We are concerned about the job losses and we want to turn the corner,” Zwelinzima Vavi, general secretary of the Congress of South African Trade Unions, said in an interview. “The only way we can do that is to make money cheap for manufacturers so that they can afford to borrow and expand firms and jobs.”
South Africa’s hosting of the World Cup may also have driven up inflation as hotels and restaurants pushed up prices and state-owned South African Airways increased rates for domestic flights by as much as 50 percent, prompting investigations by antitrust authorities.
Timing
Manufacturers, such as Johannesburg-based Sasol Ltd., the world’s largest maker of motor fuel from coal, and Vanderbijlpark-based ArcelorMittal South Africa Ltd., a unit of the world’s biggest steelmaker, are calling for lower rates and a weaker rand to stimulate growth.
“Rates should come down substantially to help businesses who want to invest, stimulate consumer demand and weaken the rand,” said Roger Pitot, executive director of the Johannesburg-based National Association of Automotive Component and Allied Manufacturers, which is calling for a 1 percentage point cut at this week’s meeting.
“There’s a good likelihood rates will come down some time this year,” said Nigel Rendell, an emerging-market strategist at RBC Capital in London. “The only issue is the timing.”
To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net; Nasreen Seria in Johannesburg at nseria@bloomberg.net.
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