MARIAM ISA, Johannesburg | Friday
THE weakening rand, and associated inflation concerns, have ended the prospect of a cut in South African interest rates this year – and they might even have to rise, say analysts.
Domestic money markets are now pricing in unchanged rates for the rest of the year after recent increases in key yields, which traders say reflected the erosion of the widely-held view that commercial lending rates will be cut in the coming months.
So far the market is not pricing in a hike in commercial lending rates, which have stayed at 14.50% since the start of 2000 despite the central bank’s decision last October to raise its key repo rate by 25 basis points to 12%.
But economists are starting to worry that the central bank will be tempted to hike again to quell price pressures fanned by the volatile rand and rising domestic fuel prices to ensure it meets its inflation target for 2002.
If the repo goes up by another 25 basis points, commercial lending banks will raise their prime lending rate by 50 basis points to widen shrinking profit margins, they warn.
News that the benchmark three-month Bankers’ Acceptance Rate went up by 15 basis points to 10.60% on Wednesday has reinforced those concerns, as this was the first time that the rate has gone up since the repo was hiked in October.
But traders say the yield was merely catching up with recent gains in other short-term money market instruments, such as treasury bills, certificates of deposit (CD).
The 12-month CD rate now stands at 11.05%, up from 10.70% a month ago but down from 10.20% on Wednesday, when news that the government had revised last year’s budget deficit estimate lower dramatically boosted bonds.
Three-month CD rates have risen to 10.55% from 10.45% last month, while forward rate agreements of the same duration crept up to 10.67% from 10.54%.
Analysts see a 30-40% chance that the central bank – which has repeatedly warned that the weak rand and high oil prices are inflation threats – will raise its repo rate at its next monetary policy meeting, which ends on April 25.
The bank’s targetted CPIX inflation measure rose by an annual 7.7% in February for the second consecutive month. It must get the rate down to between 3-6% over the whole of 2002.
Analysts say the main pressure on the index is coming from the fact that domestic fuel prices are still rising, while the depreciating rand is making imports more expensive.
So far, domestic producers have not passed climbing costs on to consumers. But the rand’s 7% slide against the dollar so far this year makes many wonder how long this can last.
The rand hit a new low of 8.17 against the dollar on Wednesday, but has since firmed to around 8.04 in the wake of a strong recovery in the euro against the US unit.
However, fears that expected capital flows may not materialise this year and expectations that global equities will remain volatile are likely to keep the pressure on the unit. – Reutersn the unit. – Reuters
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