Rand Rally Easing Pressure on South Africa to Increase Rates

  • Currency's 2nd-best gain since 2012 soothes SARB policy bind
  • Holding rates seen supporting domestic economic growth

A rally in the rand is helping to ease the bind facing South African monetary policy makers worried about inflation.

The rand posted its biggest weekly advance since the five days through March 20 last week as prospects for higher U.S. interest rates this year receded. That prompted investors to decrease bets of an increase in South African borrowing costs. Forward rate agreements, which last month predicted a 25 basis-point increase in interest rates, show there is less than a 33 percent chance that the Reserve Bank will move by the end of this year.

Governor Lesetja Kganyago is ready to adjust monetary policy if the rand’s fall against the dollar this year filters through to the economy, he said last week. Factory production unexpectedly contracted in August, marking six months of negative output this year. Another rate rise, following two increases since July last year, may further stifle the nation’s gross domestic product, which contracted in second quarter.

“There’s no reason to move if a weaker GDP outlook is softening the inflation outlook,” Gina Schoeman, an economist at Citigroup Inc. in Johannesburg, said by phone on Oct. 9.

The rand weakened for the first time in six days on Oct. 9, dropping 0.3 percent to 13.3512 per dollar. That pared gains for the week to 2.9 percent as almost all emerging-market currencies advanced against the greenback. It advanced 0.2 percent to 13.3215 per dollar as of 11:21 a.m. in Johannesburg on Monday.

“Should the currency build on its recovery this past week, it would probably provide sufficient support for the MPC to remain on hold at its next meeting in November,” Desislava Rusinova, Middle East and Africa chief economist for CEEMarketWatch, said by e-mail.

The International Monetary Fund last week cut its forecast for South Africa’s growth in 2015 to 1.4 percent from a previous estimate of 2 percent, while business confidence slumped to its lowest in 22 years in September.

Interest-rate futures are pricing in a 39 percent likelihood of an increase in U.S. rates in December, down from 60 percent a month ago, after minutes of the Federal Reserve’s latest policy meeting showed officials are concerned about China’s slowing growth and the risk of a stronger dollar weighing on U.S. exports.

South African inflation eased to 4.6 percent in August from 5 percent a month earlier, while core inflation -- which strips out energy and food and is monitored by the central bank -- has been declining since June. Policy makers have forecast the gauge will move above its 3 percent to 6 percent target range next year.

The Reserve Bank’s hawkish tone is deterring foreign investors in South African equities, potentially cutting inflows into the economy,  Annabel Bishop, chief economist at Investec Ltd., said by phone from Johannesburg. While foreign investors have sold local stocks all but one day this month, the bond market has seen large net purchases, according to data provided by the Johannesburg Stock Exchange. 

“There should be no more hikes at all this year and next,” she said.

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