Gordhan’s Duel With Police Stirs South Africa Rate-Rise Caseby
Inflation expectations surges as the rand fell against dollar
Mminele sees too many risks to say increase cycle is over
A stand-off between South African Finance Minister Pravin Gordhan and the country’s police force has caused the rand and bonds to plunge. The next victim could be the nation’s consumers.
As recently as a week ago, traders bet that rates will stay unchanged in the next year and a half as the rand strengthened and inflation slowed toward the central bank’s target. By Friday, the market was pricing in more than 40 basis points over the next 18 months as concern that Gordhan’s job is on the line sent the currency tumbling.
Gordhan, 67, said on Aug. 24 his attorneys received a letter from the Hawks, a special police unit, requesting that he present himself to the division’s office. He did not comply with the request. The Sunday Times newspaper reported in May the finance minister may face dismissal and arrest on espionage charges for setting up a unit in the South African Revenue Service to spy on politicians including President Jacob Zuma when he headed the tax agency between 1999 and 2009.
“We’ve been doing very well over the past few months in currency movements, and then all of a sudden our political idiosyncrasies have blown us out of the water,” Chris Gilmour, an analyst at Barclays Wealth and Investment Management in Johannesburg, said by phone. “No one will admit that movements by the Reserve Bank could be influenced by political influences, but of course they are indirectly.”
After the benchmark repurchase rate by 125 basis points since July last year, the Monetary Policy Committee kept the measure unchanged at 7 percent at its past two meetings, helping to support an economy it says won’t grow at all this year. Higher borrowing costs are squeezing consumer finances in a country with a 27 percent jobless rate and where debt amounts to 77 percent of households’ disposable income.
Inflation expectations, as measured by the five-year breakeven rate, surged 43 basis points between Tuesday and Friday, compared with a two basis-point drop in emerging-market peer Turkey. By Monday, forward-rate agreements showed investors are betting on 52 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.
While inflation slowed to the top end of the Reserve Bank’s 3 percent to 6 percent target band in July, there are too many risks in the policy environment to say the interest-rate increase cycle is over, Deputy Governor Daniel Mminele said in a speech on Friday. The central bank forecasts price growth will remain above target until the middle of next year.
“The weaker rand will mean higher inflation expectations, which according to the monetary policy, would need to be taken into account,” Kevin Algeo, managing director at equities trader IG South Africa, said by phone from Johannesburg Friday. “However, we are in a low-growth environment and an environment where they need to be supportive of the economy.”
The rand weakened 0.6 percent to 14.4455 by 3:56 p.m. on Monday in Johannesburg. Yields on rand-denominated government bonds due December 2026 rose 10 basis points to 9.07 percent.
The central bank would also have to take cognizance of the possible effect of a credit-rating downgrade on the economy, Algeo said.
Since being reappointed in December, Gordhan has led the government’s efforts to retain an investment-grade debt assessment by meeting with business and labor leaders and investors to seek measures to boost growth and confidence. Gordhan returned to the post he held from 2009 until 2014 after Zuma was forced to alter a decision to replace Nhlanhla Nene as finance minister with little-known lawmaker David van Rooyen. His efforts may come to naught.
“There’s an inability to put the state of the economy first,” Ian Cruickshanks, chief economist at the South Africa Institute of Race Relations in Johannesburg, said by phone. “This is going to mean that there will be shocks to the rand exchange rate over time and it will hence impact monetary policy over the second half of this year.”