South Africa Central Bank Warns of Higher Rate as CPI Risks Rise

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South Africa’s central bank gave its strongest indication yet that it will raise interest rates in coming months as higher energy costs and a weaker rand threaten the inflation target.

While the Monetary Policy Committee agreed to keep the benchmark repurchase rate unchanged at 5.75 percent, two of the six members favored an increase of 25 basis points, Governor Lesetja Kganyago told reporters on Thursday in the capital, Pretoria. All 26 economists surveyed by Bloomberg predicted the rate would stay on hold.

Policy makers have kept borrowing costs unchanged since July to help support an economy that’s been hit by strikes and power cuts. Inflation risks are rising, though, with the rand likely to come under more pressure as the U.S. Federal Reserve tightens monetary policy and South Africa’s state-owned power utility pushes to raise tariffs, Kganyago said.

“The deteriorating inflation outlook suggests that this unchanged stance cannot be maintained indefinitely,” he said. “We commenced tightening in January last year. We are still in that cycle.”

Inflation quickened to 4.5 percent in April from 4 percent in the previous month, remaining within the bank’s 3 percent to 6 percent target band for an eighth month. The inflation rate will exceed 6 percent in the first quarter of next year and remain close to the upper end of the target for the rest of the forecast period, Kganyago said.

‘Hawkish Note’

“The MPC behaved as expected but ended on quite a hawkish note,” Adenaan Hardien, chief economist at Cadiz Asset Management, said by phone from Cape Town. “It is clearly preparing us for rate hikes pretty soon. Our view of rate hikes from the third quarter of this year seems to be a good bet at this stage.”

Consumer prices will increase an average 4.9 percent this year, up from a previous estimate of 4.8 percent, according to the MPC.

Speculation that the Fed may increase interest rates this year has curbed appetite for emerging-market assets, contributing to the rand’s 2.3 percent slump against the dollar in 2015. That’s adding to import costs at the same time that crude oil recovers, boosting gasoline prices.

The rand fell to 11.8473 per dollar at 5:20 p.m. in Johannesburg from 11.8031 before the governor began speaking. It rallied to 11.7314 per dollar during the speech. Yields on the bond due December 2026 pared an earlier drop to trade at 7.97 percent after declining to as low as 7.94 percent.

Energy Crisis

The MPC’s hesitancy to raise interest rates may count against it, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

“For a central bank that’s clearly increasingly concerned about inflationary pressures, the South African Reserve Bank is doing its best to put off the day of reckoning,” Spiro said in e-mailed comments. “This was a relatively hawkish statement from a steadfastly dovish central bank. The perception that the SARB has fallen behind the curve is growing with each passing day.”

Brazil’s central bank has raised its benchmark interest rate five times to 13.25 percent, the highest level since January 2009, to help bring inflation back into the target.

South African forward rate agreements, used to speculate on borrowing costs, fell five basis points to 6.32 percent on Thursday, pricing in less than a quarter percentage point rate increase at the next meeting in July.

Slowest Pace

An energy crisis is clouding the outlook for economic growth and inflation in South Africa. Eskom Holdings SOC Ltd., the state-owned power utility, is implementing regular rolling blackouts this year because it can’t meet demand, while seeking to raise tariffs by 25 percent to plug a cash-flow shortfall.

The MPC reduced its economic-growth forecast for this year to 2.1 percent from 2.2 percent, while estimating expansion of 2.2 percent in 2016. Africa’s second-largest economy expanded 1.5 percent last year, the slowest pace since the recession in 2009.

“Growth remains fragile,” Kganyago said. “Constrained by electricity shortages and low business confidence the risk to the outlook remains to the downside. This cannot be solved by monetary policy alone.”

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