Economists kept guessing on Reserve Bank rate call

Economists are divided over whether South African Reserve Bank Governor Gill Marcus will act to counter above-target inflation, or support weak consumer spending and sputtering economic growth.

Fifteen of the 30 economists surveyed by Bloomberg say the central bank’s Monetary Policy Committee will keep the repurchase rate at 5.5% on Thursday, with the rest forecasting increases of 25-to-50 basis points. Forward-rate agreements, used to lock in borrowing costs, climbed 26 basis points in the past month to 6.09% on Tuesday, indicating that traders are pricing in a 25 basis-point jump in the benchmark.

Policy makers have kept borrowing costs unchanged since January as a five month platinum-mining strike and subdued consumer demand curbed growth in Africa’s second-largest economy. With inflation at 6.6% in May and set to remain above the 3% to 6% target until next year, Marcus may struggle to hold of raising interest rates, said Jana van Deventer at ETM Analytics.

“Given that the Reserve Bank’s primary mandate is inflation targeting, one can argue that they have to implement more policy tightening to ensure CPI [Consumer Price Inflation] doesn’t stay outside the target band for too long,” Van Deventer, an economist at ETM, said by phone from Johannesburg on Tuesday. “Given the weakening growth prospects, the Sarb [South African Reserve Bank] may opt to increase rates by 25 basis points rather than 50.”

Inflation peak
Marcus said last month the January rate increase wasn’t a “one-off move,” and raising the benchmark rate by 25 basis points is a possibility. The last time the central bank adjusted the repurchase rate by less than 50 basis points was in October 2000, shortly after it adopted an inflation-targeting policy, when it raised the rate by a quarter point.

At the previous rate-setting meeting in May, the bank said inflation will probably peak in the fourth quarter at 6.5%, fueled by a weaker rand.

The currency gained 0.1% against the dollar to trade at 10.6969 as of 1.06pm in Johannesburg, taking its decline in the past 12 months to 7.8%. Yields on the government’s benchmark rand bonds due December 2026 fell six basis points, or 0.06 percentage points, to 8.21%.

Policy makers have been reluctant to raise borrowing costs after the mining strike caused the economy to contract in the first quarter and consumer spending remains under pressure.

Metals strike
While Marcus said last month a recession is unlikely, a stoppage by more than 220 000 workers in the metals and engineering industry that began on July 1 is raising renewed concern about growth. The central bank estimates the economy will expand 2.1% this year.

“If they were to give growth a larger consideration then we’re unlikely to see an interest-rate hike,” Thabi Leoka, an economist at Renaissance BJM Securities, said by phone from Johannesburg on Tuesday. “We should also remember their primary mandate is price stability and if we have inflation increasing above their forecast trajectory, it is quite clear that inflationary pressures are key and should be top of mind.”

The difference in yield between five-year fixed-rate bonds and index-linked debt, a measure of investors’ price expectations, rose 30 basis points to 6.6 percentage points since the last Monetary Policy Committee meeting.

Hawkish tone
One-year interest-rate swaps, used to lock in borrowing costs over the period, rose six basis points in the past month to 6.35% compared with a six basis-point drop in similarly rated emerging-market peer Brazil.

“It will be difficult for the South African Reserve Bank to have a hawkish tone and maintain that we’re in a hiking cycle if they keep rates on hold for much longer,” Nazmeera Moola, an economist and strategist at Investec Asset Management in Cape Town, said in an emailed note to clients on Tuesday. “At some point they will have to hike, or else the market will stop believing that rates will rise.” – Bloomberg

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Rene Vollgraaff
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