South African Rate Bets Scaled Back as Price Pressures Ease

  • Federal Reserve delay gives central bank room to breathe
  • Inflation rate fell for the first time in six months

Investors have scaled back bets that South Africa’s central bank will raise borrowing costs on Wednesday after the Federal Reserve delayed its rates liftoff and as inflation expectations ease.

Forward-rate agreements starting in one month, used to speculate on borrowing costs over the period, are pricing in four basis points of rate increases, down from a full quarter-percentage point advance on Aug. 24. Twenty-nine of 31 economists surveyed by Bloomberg forecast the Reserve Bank will keep its benchmark repurchase rate unchanged at 6 percent, with two predicting a 25 basis-point increase.

Keeping the benchmark rate unchanged would support an economy that contracted for the first time in more than a year in the second quarter, weighed down by an electricity crisis and weak factory output. A slump of almost 30 percent in crude oil prices since this year’s peak in May is helping reduce fuel costs, taming inflation expectations even as the rand weakened 15 percent against the dollar since the start of 2015.

“The Fed has given us room to breathe,” George Herman, head of South African investments at Cape Town-based Citadel Investment Services, said by phone on Tuesday. “South Africa’s inflation profile has also improved over the last few weeks due to lower energy prices.”

The five-year breakeven rate, a measure of bond investors’ inflation expectations, dropped 31 basis points since Aug. 24 to 6.4 percent. A government report on Wednesday showed price growth slowed to 4.6 percent last month from 5 percent in July, the first decline in the inflation rate in six months.

The rand weakened 0.1 percent to 13.6930 per dollar as of 10:19 a.m. in Johannesburg on Wednesday. Yields on rand-denominated government bonds due December 2026 fell two basis points to 8.39 percent.

The monetary policy committee cited risks that price growth will exceed the upper end of its target range because of the weaker rand when it raised borrowing costs for the first time in a year in July. The Reserve Bank seeks to maintain inflation between 3 percent and 6 percent.

The rand is “one of the reasons why the Reserve Bank preemptively moved at the last meeting,” Malcolm Charles, a portfolio manager at Investec Asset Management, said by phone from Cape Town on Tuesday. “We’ve got a preemptive rate hike in the bag, so they’ve maintained credibility and they’ve bought themselves some time.”

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