Rand Rallies as South Africa Boosts Size of Rate Increase

  • Stanlib's Lings sees another 75 basis points of rate hikes
  • Yields drop to Dec. 23 low as bank takes aim at inflation

The rand gained to the strongest level against the dollar in three weeks after South Africa’s central bank ramped up the magnitude of interest-rate increases, spurring speculation more are to come.

The currency of Africa’s most industrialized economy rallied as much as 1.7 percent, the biggest advance on a closing basis since Dec. 14, to 16.1529 per dollar as the Reserve Bank lifted the benchmark rate by half a percentage point to 6.75 percent. Yields on benchmark bonds declined to the lowest level since Dec. 23.

“Accelerating inflation comes at a time when South Africa’s growth prospects look increasingly bleak,” John Ashbourne, Africa economist at Capital Economics Ltd., said in a note to clients. “The SARB faced an unenviable choice, and policymakers decided to prioritize strengthening the bank’s inflation-fighting credentials over fears that a hike would further weaken the economy. Given this stance, we expect that rates will be hiked again later this year."

The rand’s 15 percent plunge against the dollar since the last policy meeting in November has forced the Reserve Bank to take more aggressive action after limiting its rate increases last year to quarter-point moves. Inflation risks are rising as the worst drought in more than a century boosts food prices, threatening the central bank’s 3 percent to 6 percent target range and outweighing concerns the economy may tip into a recession.

Liquidity Pledge

The rand was also boosted by comments that the central bank may provide liquidity to ensure orderly markets, and after a report that showed U.S. orders for business equipment fell in December by the most in 10 months, according to Christopher Shiells, a senior emerging-market analyst at Informa Global Markets (Europe) Ltd. in London. The currency plunged to a record 17.9169 per dollar in a flash crash on Jan. 11 during thin Asian trading.

The currency gained 1.3 percent to 16.2238 per dollar by 5:51 p.m. in Johannesburg to head for a second straight week of gains. Yields on rand-denominated bonds due December 2026 fell 14 basis points to 9.48 percent.

Higher borrowing costs will further burden struggling consumers in South Africa, with the likelihood of the economy contracting for two successive quarters in 2016 is 45 percent, according to the median estimate of nine economists surveyed by Bloomberg this month. That’s up from a 25 percent probability in December. Four of the analysts predict a recession this year.

The central bank expects growth to slow to 0.9 percent this year from a forecast of 1.5 percent at its previous meeting in November. Monetary policy could not solve the constraints on the economy and the bank was still in a tightening cycle, Kganyago said.

“The bank made it clear that although the economy has weakened significantly further, with risk to the downside, failure to act through and increase in interest rates could cause inflation expectations to become un-anchored,” Kevin Lings, the chief economist of Johannesburg-based Stanlib Asset Management, said. “The Reserve Bank will continue to increase interest rates in 2016. At this stage we expect the repurchase rate to end 2016 somewhat higher at 7.50 percent.”

Before it's here, it's on the Bloomberg Terminal.