Inflation Leaves Little Doubt on South Africa Rate Path

Photographer: Nadine Hutton/Bloomberg

Gill Marcus, governor of South Africa's Reserve Bank. Close

Gill Marcus, governor of South Africa's Reserve Bank.

Close
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Photographer: Nadine Hutton/Bloomberg

Gill Marcus, governor of South Africa's Reserve Bank.

Investors are betting South African central bank Governor Gill Marcus will stick to her promise to rein in inflation by raising interest rates again even as the economy is threatened with a recession.

Forward-rate agreements, used to speculate on borrowing costs, are signaling another 25 basis-point increase at the central bank’s next meeting in two months after the Monetary Policy Committee lifted the benchmark by 25 basis points to 5.75 percent yesterday. The rand strengthened as much as 0.7 percent against the dollar after Marcus said policy makers are in a “rate-hiking cycle.”

“The bank can’t afford to cry wolf,” Asief Mohamed, chief investment officer of Aeon Investment Management, which manages the equivalent of $173 million in assets, said by phone from Cape Town yesterday. “They will have to keep raising gradually to protect their credibility.”

Inflation (SACPIYOY) has exceeded the central bank’s 3 percent to 6 percent target in April and May and the bank only sees the measure falling below the upper band in the second quarter of next year. A weak rand, high wage settlements and rising food costs pose a risk to the outlook for consumer prices, while growth is subdued, Marcus said in the capital, Pretoria.

“The MPC faces an increasingly difficult dilemma of rising inflation and slowing growth,” she said yesterday. “Monetary policy should not be seen as the growth engine of the economy. The sources of the below-par growth performance are largely outside the realms of monetary policy.”

Weak Growth

The yield on the rand-denominated bond maturing in September 2015 rose three basis points, or 0.03 percentage point, to 6.65 percent yesterday, while similarly dated debt for Turkey, which cut its benchmark rate by 50 basis points, increased two basis points.

Marcus cut South Africa’s 2014 growth forecast to 1.7 percent, from 2.1 percent at the MPC’s last meeting in May, after the economy contracted in the first quarter following a five-month strike at platinum mines. The forecast for 2015 was lowered to 2.9 percent from 3.1 percent. The bank has yet to factor in the effects of a walkout by more than 220,000 metalworkers that’s now in its third week, Marcus said.

The strikes and weak manufacturing growth may cause gross domestic product to shrink for a second consecutive quarter, a technical recession, according to Mike Schussler, chief economist at Johannesburg-based Economists.co.za. Marcus said the outlook for the three months through June is “positive but subdued.”

Clear Message

“The 25 basis point hike was more a question of credibility for the Reserve Rank,” Lullu Krugel, an economist at KPMG LLP, said by phone from Johannesburg yesterday. “It was a way to send a clear message that they are committed to their mandate without hurting the economy too much.”

The rand rallied to 10.6456 against the dollar from 10.72 before Marcus spoke, then reversed those gains after a Malaysian jet carrying 295 people crashed in Ukraine. The currency was 0.6 percent stronger at 10.6940 per dollar at 10:34 a.m. in Johannesburg.

One-year interest-rate swaps, used to lock in borrowing costs over the period, have risen 72 basis points this year through yesterday to 6.28 percent.

“This was a grudging rate hike,” Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy, said in e-mailed comments. “The central bank is caught between a rock and a hard place and is quite candid about its predicament.”

Broad Consensus

The central bank had kept the benchmark on hold since January, when it increased it by 50 basis points.

Seven of the 30 economists surveyed by Bloomberg predicted the quarter percentage-point increase, eight forecast a 50 basis-point raise and the rest expected the rate to stay unchanged. Five of seven MPC members voted for the 25 basis-point move, with one calling for a bigger adjustment, Marcus said.

“There seems to be broad consensus among the MPC that smaller increments” are appropriate, Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg. “Twenty five basis points is not only appropriate and the right thing to do right now, but could also be seen as the size of increments going forward.”

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Rene Vollgraaff in Johannesburg at rvollgraaff@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net Gordon Bell

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