South Africa Rate Bets Pared in Meeting Too Close to Call

  • 16 of 26 economists see the central bank leaving rate on hold
  • Inflation forecast to breach top of target range next year

Investors pared bets that South Africa’s central bank will tighten monetary policy on Thursday in a decision that’s confounding traders and policy makers as they anticipate the U.S. Federal Reserve’s first rate increase in almost a decade.

Forward-rate agreements starting in one month, used to speculate on borrowing costs, show a less than 40 percent chance that the Reserve Bank will raise the benchmark rate by 25 basis points to 6.25 percent, according to data compiled by Bloomberg. That’s down from close to 70 percent probability on Nov. 13. Of the 26 economists surveyed by Bloomberg, 16 predict the rate will stay unchanged, while the rest expect a quarter-point increase.

“It’s very close,” Bart Stemmet, an economist at NKC African Economics, said by phone from Paarl, outside Cape Town. “They might just decide not to hike on Thursday, but then to do it in January.”

Governor Lesetja Kganyago and his team have been wary of tightening policy in the face of a weak economy, adopting a gradual approach that’s seen the benchmark rate raised three times since the beginning of last year. Higher interest rates in the U.S., which may come as early as next month, has the potential to drag the rand down further after it plunged to a record low against the dollar this week.

Inflation pressures are rising at the same time that low global demand, falling metal prices and an electricity shortage weigh on the economy. Gross domestic product contracted in the three months through June, while retail sales fell 1.9 percent in September from a month earlier, according to the statistics office.

The inflation rate, which rose to 4.7 percent in October, is forecast by the central bank to breach the 3 percent to 6 percent target next year. Core inflation, which excludes food, gasoline and energy costs, slowed to 5.2 percent in October, a two-year low, from 5.3 percent in the previous month, the statistics office said on Wednesday.

The rand gained 0.4 percent to 14.1146 per dollar by 7:27 a.m. in Johannesburg on Thursday, paring its decline this year to 18 percent.

“So far, there have not been a lot of second-round effects from the weaker rand, but they talk about it and I think they are worried that the Fed might be the last straw,” said Stemmet.

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