Rand Plunge Has Investors Guessing: Will SARB Move Before Fed?by
November rate rise seen possible as Fed lift-off draws nearer
Declining factory output, weak economy compound policy dilemma
The rand’s plunge to a record against the dollar has shaken any complacency investors may have had about prospects for a South African rate increase this year.
As recently as last week, forward-rate agreements predicted only a 30 percent change of an increase in borrowing costs at the Monetary Policy Committee’s final meeting of the year on Nov. 19. That probability jumped to more than 60 percent after U.S. jobs data on Nov. 6 bolstered the case for tightening by the Federal Reserve in December. The question now facing investors is no longer if the South African Reserve Bank will tighten policy, but whether it will do so before the Fed, according to Rand Merchant Bank.
Reserve Bank Governor Lesetja Kganyago left the benchmark repurchase rate at 6 percent in September after the MPC raised borrowing costs by a total of 1 percentage point since last January to keep inflation in its 3 percent to 6 percent target band. While low global demand, falling metals prices and an electricity shortage are weighing on output, the rand, which slumped to a record of 14.3755 per dollar on Tuesday, risks boosting inflation.
“The reason why the SARB will potentially move is that if the Fed moves there will be quite a strong selloff in the rand and in emerging markets,” Gordon Kerr, a trader at Johannesburg-based RMB, said by phone on Monday. “The question is obviously: will they pre-empt or will they not? Will they move now in November or will they wait until the Fed moves in December and then move in January?”
While the inflation rate was unchanged at 4.6 percent in September, the Reserve Bank forecast price growth will exceed the upper limit of its target range in the first and last quarters of next year. The central bank is wary of an upward drift in price expectations and stands ready to tighten policy further should that happen, Deputy Governor Francois Groepe said on Nov. 6.
The five-year break-even rate, a measure of bond investors’ inflation expectations in the period, rose eight basis points this month to 6.32 percent. That compares with a 21 basis-point increase over the same period in Turkey, an emerging-market peer. The fact that the break-even rate is quite well anchored is consistent with expectations on policy tightening because it shows the market is confident that the central bank will act to rein in price increases, according to Michael Keenan, a strategist at Barclays Plc’s South African unit.
Factory production declined in six out of nine months this year, pushing the economy toward recession and compounding the Reserve Bank’s dilemma. A government report on Tuesday showed manufacturing output increased by 0.9 percent in September from a year earlier.
“It seems to me like they are willing to hike rates to focus on their core mandate and feel that they won’t damage growth too extensively,” Keenan said by phone from Johannesburg on Monday. “They will be concerned about how the weakness in the currency is going to filter through ultimately into higher prices.”
The rand weakened 0.5 percent to 14.3681 per dollar as of 3:52 p.m. in Johannesburg on Tuesday after sliding 0.9 percent on Monday. Yields on rand-denominated government bonds due December 2026 rose one basis point to 8.62 percent after rising five points on Monday.
“The currency at these levels certainly raises the risk” of an interest-rate increase, Nazmeera Moola, an economist and strategist at Investec Asset Management, said by phone from Cape Town. “If it continues to depreciate I think that could push them into moving.”