Analysts Split as Traders Hedge Bets on South African Rate Rise

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South African Interest Rate Bets in FRA Market
Forward Rate Agreements over Jibar

Economists haven’t been so divided in a year on South African interest rates. There isn’t much consensus among traders either.

Reserve Bank Governor Lesetja Kganyago will probably announce an increase in borrowing costs of 25 basis points to 6 percent, according to 17 of 31 economists surveyed by Bloomberg. The rest predict no change in the widest variance in opinion since policy makers raised the repurchase rate last July, according to data compiled by Bloomberg. That said, the median estimate hasn’t correctly predicted rate changes since November 2010.

Kganyago and his deputies have repeatedly warned that the central bank can’t keep delaying rate increases as Africa’s most industrialized economy struggles with anemic growth while a weaker rand and higher energy and food costs threaten to stoke prices. With inflation seen climbing outside the central bank’s target and the Federal Reserve moving closer to tightening, the dilemma facing policy makers is deepening.

“The SARB will balance the risks more toward the growth outlook, for now,” Manisha Morar, an economist at ETM Analytics, who sees rates on hold on Thursday, said by phone from Johannesburg. “However, we view the bias for local interest rates as skewed higher this year.”

The path is no clearer in the market either. Forward-rate agreements starting in two months and used to speculate on rates, are predicting 9 basis points of increases based on the spread over the three-month Johannesburg Interbank Agreed Rate. That indicates traders see a 36 percent probability of a 25 basis point move upwards. Five weeks ago, FRAs were 84 percent certain of an increase after pricing in a cut in borrowing costs as recently as January.

‘Cause to Pause’

The contracts dropped 5 basis points to 6.25 percent on Wednesday, a two-week low, after a report that showed South Africa’s inflation rate rose less than economists predicted in June. Inflation accelerated to 4.7 percent from 4.6 percent in May, against a median estimate of 5 percent.

The rand weakened 0.1 percent to 12.4225 per dollar as of 11:43 a.m. in Johannesburg on Thursday, extending losses over the past 12 months to 15 percent. Yields on rand-denominated bonds due December 2026 dropped 2 basis point to 8.10 percent after rising to 8.47 percent on June 17, the highest since April 2014.

The “softer-than-expected tone” in the inflation numbers will mean the monetary policy committee’s decision is “even more finely balanced,” Barclays Plc economists Peter Worthington and Miyelani Maluleke said in a note on Wednesday. While the central bank is still likely to raise by 25 basis points on Thursday, the inflation data may “give a wavering MPC member cause to continue to pause,” they said.

Policy makers will probably boost the rate by 25 basis points on Thursday and remain on hold until mid-2016, Standard Bank Group Ltd. strategists Walter de Wet and Shireen Darmalingam wrote in a note on Tuesday. The central bank is in a “stagflationary bind with credibility concerns,” they said.

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