Too-Close-to-Call South Africa Rate Move Puts Kganyago on Spot

  • Economy's outlook deteriorated since last MPC meeting
  • Inflation accelerated to 17-month high of 6.2% in January

The South African Reserve Bank’s policy dilemma has left the market guessing on what Governor Lesetja Kganyago will do next.

With the economy threatened with recession and inflation above the 3 percent to 6 percent target, economists and traders are divided on Thursday’s interest rate move. Half of the 30 analysts surveyed by Bloomberg predict the Monetary Policy Committee will keep the benchmark rate unchanged at 6.75 percent, 14 expect a 25 basis-point increase and one forecast 50 basis points of tightening.

“It will be very close,” Thabi Leoka, an economist at Argon Asset Management in Johannesburg, said by phone on Tuesday. “Inflation expectations show we should maintain a rate-hiking cycle, but if you look at where growth is, you can’t be pulling the lever too strongly, or else we’ll risk being in a recession.”

Traders have pared their rate expectations, with forward-rate agreements starting in one month, used to speculate on borrowing costs, now pricing in a 76 percent probability that the MPC will raise rates by 25 basis points. On Feb. 29, the FRAs showed a 100 percent chance of a rate increase.

The economy’s outlook has worsened since the last MPC meeting. The World Bank cut its growth forecast for the year to 0.8 percent from 1.4 percent, while manufacturing and mining output, which together make up about a fifth of gross domestic product, contracted in January.

‘Strict Mandate’

A government report on Wednesday showed retail sales growth slowed to 3.1 percent in January from 4.1 percent in the previous month. Sales declined 0.3 percent in the month.

“They must think about what is more important at the moment,” Busisiwe Radebe, an economist at Nedbank Ltd., said by phone from Johannesburg on Tuesday. “Are they going to let inflation slip and then try to support growth by not raising rates? I think inflation would weigh heavier because that is their direct strict mandate.”

Inflation accelerated to a 17-month high of 6.2 percent in January as the rand’s 18 percent plunge against the dollar in the past six months and the worst drought in more than a century boost costs. The five-year break-even rate, a measure of bond investors’ price expectations in the period, rose 32 basis points this month to 7.45 percent, compared with a 53 basis-point decline in Turkey, an emerging-market peer.

Kganyago’s job is being complicated by an increase in political risk in South Africa, contributing to the rand’s weakness. In December, President Jacob Zuma caused market fallout when he unexpectedly fired his finance minister.

MPC Split

Current Finance Minister Pravin Gordhan is facing questions from the police related to an investigation at the tax agency, heightening political tension. The rand weakened 1.1 percent to 16.1034 per dollar as of 1:15 p.m. on Wednesday in Johannesburg after plunging 2.5 percent on Tuesday when a specialist police unit indicated it will force Gordhan to cooperate in the probe.

Yields on rand-denominated government bonds due December 2026 were mores or less unchanged at 9.44 percent. That also prompted traders to increase bets on an interest-rate increase this week.

Central bank Deputy Governor Daniel Mminele was asked by investors during an international roadshow last week about the effect of the drought and weak rand on inflation. They also questioned him about the policy dilemma of slow growth and accelerating inflation, he told reporters on March 14.

The MPC was split in the January meeting, when the benchmark rate was raised by half a percentage point, with three committee members calling for a 50 basis-point increase, two for a 25 basis-point hike and one for no change.

“This is as close to a 50-50 call as you can get,” George Herman, head of South African investments at Citadel Investment Services, said by phone from Cape Town on Tuesday. “Both sides of the debate are very credible at this point in time and it simply depends on how they will play it on the day.”

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