SARB’s Mminele Sees Too Many Risks to Say Hiking Cycle Is Over

  • Inflation to remain outside target band until mid-2017
  • Currency remains a risk factor for price growth, Mminele says

South Africa’s cycle of interest-rate increases has not yet run its course, according to Reserve Bank Deputy Governor Daniel Mminele.

“The risks in the policy environment remain too numerous to be able to say definitively that the hiking cycle is over,” Mminele said in a copy of a speech posted on the central bank’s website. That’s even as “the recent improvements to the inflation outlook are a positive development.”

While price growth slowed to 6 percent in July, the lowest rate this year, the rand slumped and inflation expectations, as measured by the five-year breakeven rate, surged to the highest in more than five weeks on Thursday following reports that a special police unit has summoned Finance Minister Pravin Gordhan to its office. The Monetary Policy Committee left its benchmark repurchase rate unchanged at 7 percent at its last two meeting and said in July it pressed the “pause” button on the increase cycle.

The MPC has raised borrowing costs by 125 basis points since July last year as it sought to steer inflation back into its 3 percent to 6 percent target range. Much of the current increase cycle has been about preventing second-round price effects, Mminele said. The central bank forecasts inflation will only return to the target band by the middle of next year.

The rand strengthened 0.3 percent to 14.1726 per dollar at 10:34 a.m. in Johannesburg on Friday, taking its gains since the start of the year to 9.2 percent. Yields on rand-denominated government bonds due December 2026 fell three basis points to 9.04 percent.

“The currency remains an important risk factor as recent trends can quickly reverse should global risk perceptions change,” Mminele said.

Forward-rate agreements used by investors to bet on borrowing costs are now pricing in 55 basis points of rate increases over the next 18 months, compared with five basis points on Aug. 23, before the first reports about the continued police probe into the finance minister were published.

South Africa has “too much inflation” to lower rates, Governor Lesetja Kganyago said on Wednesday. The economy will probably not grow at all this year, according to the central bank.