South African Rates Seen Unchanged Even as Inflation Slows

Updated on
  • Inflation within target band for longest period since 2015
  • Rand weakness seen as biggest risk to inflation outlook

South Africa's Kganyago Sees Inflation Risk to the Upside

South Africa’s central bank has one more reason to hold its benchmark rate on Thursday.

Consumer-price growth decelerated to 4.8 percent in October, matching the median estimate in a Bloomberg survey. The rate has been inside the 6 percent upper band of the central bank’s target range for seven months, the longest streak in almost two years.

Inflation’s improvement has been countered by the rand, which vies with New Zealand’s dollar as the worst-performing major currency in the second half on concerns about higher public debt, low business confidence and political turbulence. The bank cut South Africa’s key rate for the first time in five years in July after the economy fell into a recession and will probably keep it at 6.75 percent tomorrow, a Bloomberg survey showed.

“The 25 basis-point cut we had in July was all we are going to get,” Mamello Matikinca, chief economist at FirstRand Ltd.’s First National Bank unit in Johannesburg, said by phone. “The biggest risk to the inflation outlook remains the rand and uncertainty around that.”

Over the past year, the rand is the most volatile of all currencies tracked by Bloomberg. It remains the bank’s biggest risk to price growth, central bank Governor Lesetja Kganyago said Nov. 10.

The currency gained 0.8 percent to 13.8590 per dollar by 5:42 p.m. in Johannesburg on Wednesday.

Inflation expectations, as measured by the five-year breakeven rate, have climbed 65 basis points since the Sept. 21 Monetary Policy Committee meeting to 5.93 percent Wednesday.

The core inflation rate fell to 4.5 percent in October, the lowest since July 2012, Pretoria-based Statistics South Africa said on its website Wednesday.

Forward-rate agreements starting in 12 months, used to speculate on borrowing costs over the period, show investors are pricing in more half a percentage point of rate increases by the end of next year.

Policy uncertainty and political turmoil have stalled economic reforms in Africa’s most-industrialized economy, which exited the recession in the second quarter. President Jacob Zuma made changes to his cabinet twice this year, removing Pravin Gordhan as finance minister in March and triggering two downgrades to junk for the nation’s foreign debt.

The ruling African National Congress will elect a new leader in December. The battle has grown fractious and the ANC is working to resolve its internal differences to ensure the conference goes ahead as planned and avoid a repetition of previous splits that spawned three opposition parties, Treasurer-General Zweli Mkhize said last month.

“Given the political uncertainty and the risk going into the ANC conference next month, the committee will be well-placed, in a close-on unanimous decision, to keep rates unchanged at this stage,” Jeffrey Schultz, a senior economist at BNP Paribas in Johannesburg, said by phone.

— With assistance by Simbarashe Gumbo, and Gordon Bell

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