South African money market rates are currently close to factoring in a full chance of a rate hike of 50 basis points in June.
South Africa’s 12-month negotiable certificate of deposit (NCD) was trading at 9,650% just before the last Monetary Policy Committee (MPC) meeting on April 12, where rates were left unchanged for the second successive month, but by noon on Wednesday these rates were 10 basis points weaker than that at 9,750%. The market had already been factoring in a “probability premium” of a hike in April.
A senior money market dealer told I-Net Bridge on Wednesday that while it was still anyone’s guess as to where the market would actually land up, the 9,800% level on the 12-month NCD would indicate that the market was factoring in close to a full chance of a 50 basis point rate hike.
“Of course this doesn’t give us much room to manoeuvre if CPI [consumer price index] and PPI [producer price index] come out worse than expected next week, and I suppose any further moves would then have to relate to August,” he added.
“I believe we overreacted a bit in line with what the swaps were saying. The swaps were reflecting quite a bit of volatility based on recent rand moves. We shouldn’t have followed the derivative market tit-for-tat,” stated the dealer.
However, he added that there were also liquidity issues to keep in mind.
“This is a function of what the banks want to do, and they may want to have an income based on long-term funding, for example,” concluded the dealer.
The repo rose as high as 13,5% in September 2002, before receding to 7% in April 2005, with the current tightening cycle beginning in June 2006.
In a speech earlier in the month the central bank governor, Tito Mboweni, sounded hawkish as he highlighted risks to the inflation outlook and this tone was again echoed in the central bank’s Monetary Policy Review (MPR) released last week.
In the May 4 speech at a business breakfast, the governor referred to persistently high and rising oil prices and commented that they could cause higher inflationary expectations to become more entrenched, thus increasing the probability of a further tightening of monetary policy.
These sentiments came through last week in the MPR when the central bank said that the inflation target “could be threatened” in the event of significant adverse developments in the main determinants of inflation or an insufficient response to the previous monetary tightening.
The next meeting of the MPC is scheduled for June 6 and 7 and this decision will be closely watched by the markets. ‒ I-Net Bridge