Money markets signal surprise SA rate hike as rand falls

South Africa’s battered rand may receive an unexpected boost from the central bank this week, if money-market rates are anything to go by.

While only three out of 19 economists in a Bloomberg survey are predicting a South African Reserve Bank rate increase on Thursday, traders have been adding bets on a surprise hike. Forward-rate agreements are now putting the odds of a 25 basis-point hike at more than 50%, up from just 12% a month ago.

The rand slumped 1.1% on Friday, a day after Russia’s central bank tightened policy to help support an ailing ruble. Earlier in the week, Turkey’s central bank had done the same. South Africa’s currency extended losses on Monday, with some investors expressing concern that even a hawkish hold on Thursday would leave the country vulnerable at a time when other markets are tightening.

While the Reserve Bank doesn’t target a level for the rand, the currency’s decline since August may feed through to inflation and force the central bank’s hand, according to Investec Bank, which brought forward its prediction for a rate increase to this week. The rand has weakened almost 10% since the previous Monetary Policy Committee meeting in July.

“Some second-round effects have emerged in the latest CPI inflation data, and more are likely as the rand has weakened for a sustained period, with the depreciation yet to end,” Annabel Bishop, the Johannesburg-based chief economist at Investec, said in a client note Monday. South Africa’s consumer inflation rate probably climbed to 5.2% in August, from 5.1%, data may show Wednesday, according to the median estimate in a Bloomberg survey. The central bank’s target range is 3% to 6%.

One thing that may make the central bank pause is the sluggish economy, though “in the recent past the Sarb has reiterated that it targets inflation, not growth, and has hiked in the face of weak economic performance,” Bishop said. South Africa’s economy contracted in the second quarter as the country entered its first recession since 2009.

Here is a selection of analysts’ views:

Investec

Rising inflation expectations will see the bank hike interest rates by 25 basis points, said Annabel Bishop, chief economist at Investec in a client note “Currency weakness feeds through fairly soon into higher inflation for South Africa directly via fuel prices. Indirectly, second-round effects from rand weakness occur as retailers push up the price of their goods or services. Evidence of such price pressures, and indeed a rise in inflation expectations, would contribute to a Sarb decision to lift the repo rate”. 

Nedbank

“We expect the Sarb to remain on hold this week at its MPC meeting. Despite weak economic growth, however, its tone will likely be hawkish, aiding the rand,” analysts Mehul Daya and Walter de Wet said in a client note Pressure has built on South Africa’s central bank to hike despite slowing growth following moves by Turkey and Russia’s central banks last week Analysts still bearish on the rand in the medium-term; for that view to change “we would need to see the following factors: the US Federal Reserve becoming less hawkish, China’s economic data improving, commodity prices beginning to rise, global economic data improving, global trade tensions easing and our Global $-Liquidity indicators improving. We do not believe these changes are likely to occur by year-end”.

Goldman Sachs

Bar remains high for rate hikes in South Africa; sees central bank leaving rates on hold at Thursday meeting “In our view, a larger or more disorderly FX depreciation and/or indications of fiscal loosening could prompt a pre-emptive monetary policy tightening”. “The output contraction in the second quarter will contribute to the MPC’s reluctance to consider policy tightening”.

Standard Bank

Zaakirah Ismail, fixed-income strategist at Standard Bank says Sarb will proceed cautiously ahead of the medium-term budget policy statement and Moody’s Investors Service review of South Africa’s credit ratings given the possible impact on the rand and in turn the inflation outlook. Does not expect any rate changes for the next 12 months, “while a rate hike by the Sarb may be rand-positive, we see the odds as biased towards steady interest rates at the Sarb’s MPC meeting this week”. Risks to call include central bank increasing inflation forecasts: “We acknowledge the risk that this might compel the bank to hike interest rates given its view that real rates are unsustainably low”.

Rand Merchant Bank

Mpho Tsebe, strategist at Rand Merchant Bank, now expects an interest rate hike in the last quarter of 2018 compared with a previous call for rates to increase in the last quarter of 2019 “if the current global environment persists and the rand remains under pressure”. “While the Sarb will probably revise its inflation forecast to incorporate higher oil prices and a weaker currency, it will also have to take into account a lower starting point and a larger output gap”. Rand rally following Turkey’s interest rate decision has been short-lived.