Need for rate hike fades as oil prices plunge

Pol­i­cy­mak­ers have raised the rate by 75 ba­sis points this year to curb an in­fla­tion rate that ex­ceeded the tar­get band.

The Star Early Edition - - BUSINESS NEWS - Rene Voll­graaff

IN­VESTORS are bet­ting that Le­setja Kganyago will use his first in­ter­est rate meet­ing as gov­er­nor of the SA Re­serve Bank (SARB) to keep bor­row­ing costs un­changed after oil prices plunged.

For­ward rate agree­ments start­ing in three months, used to spec­u­late on bor­row­ing costs, sig­nal another 14 ba­sis points of rate in­creases over the pe­riod, data show.

That’s down from 33 ba­sis points on Septem­ber 17, the day be­fore the last rate decision. Twenty of the 27 econ­o­mists sur­veyed fore­cast the mon­e­tary pol­icy com­mit­tee (MPC) will leave the bench­mark re­pur­chase rate at 5.75 per­cent to­day, with the rest pre­dict­ing a 25 ba­sis point rise.

Pol­i­cy­mak­ers have raised the rate by 75 ba­sis points this year to curb an in­fla­tion rate that ex­ceeded the cen­tral bank’s 3 per­cent to 6 per­cent tar­get band for five months. With the fall in oil prices help­ing to bring in­fla­tion back into the tar­get in Septem­ber, and the econ­omy fore­cast to grow at the slow­est pace since 2009, Kganyago may start his term by ex­tend­ing the pause in the mon­e­tary pol­icy tight­en­ing cy­cle.

“For now, they prob­a­bly have got scope to keep rates on hold,” Mo­hammed Nalla, the head of strate­gic re­search at Ned­bank Group, said on Tues­day. “The big­gest tail­wind fac­tor is the oil price, which has de­te­ri­o­rated mas­sively and as a re­sult we’ve seen nice” petrol-price de­creases, he said.

Oil has plunged more than 30 per­cent since June, help­ing to lower South Africa’s petrol costs in the past three months. A gov­ern­ment re­port yes­ter­day showed in­fla­tion was un­changed at 5.9 per­cent in Oc­to­ber.

The dif­fer­ence in yield be­tween five-year fixed-rate bonds and in­dexlinked debt, a mea­sure of in­vestors’ price ex­pec­ta­tions, fell to 5.81 per­cent­age points on Tues­day, 40 ba­sis points lower than on Septem­ber 18, when the MPC kept the bench­mark rate un­changed.

“In­fla­tion-sup­pres­sive ef­fects of lower oil and food prices are likely to re­sult in lower-than-ex­pected CPI [con­sumer price in­dex] out­comes over the com­ing months,” Phoenix Kalen, an emerg­ing-mar­ket strate­gist at So­ciété Générale in London, said in a note on Mon­day. “We now an­tic­i­pate a to­tal of 25 ba­sis points worth of pol­icy-rate hikes over the next 12 months, and ac­knowl­edge an in­creas­ing like­li­hood that SARB pol­icy rates may stay un­changed through year-end 2015.”

Kganyago, 49, on Novem­ber 9 took over from Gill Mar­cus, who stepped down after lead­ing the cen­tral bank for five years. He has pledged to con­tinue the pol­icy of his pre­de­ces­sor, who ad­justed in­ter­est rates just three times in the past three years.

One-year in­ter­est rate swaps, used to lock in bor­row­ing costs over the pe­riod, have fallen 19 points since the last MPC meet­ing, to 6.31 per­cent on Tues­day. That com­pares with a 14 ba­sis point drop in emerg­ing mar­ket peer Poland. The rand has gained 0.5 per­cent against the dol­lar since the MPC meet­ing, tak­ing its fall this year to 4.8 per­cent.

“The econ­omy is very flat and just look­ing at growth we should not raise rates at all,” Abri du Plessis at Gryphon As­set Man­age­ment said on Tues­day. “Given the cur­rent in­fla­tion en­vi­ron­ment, a rate hike this week looks un­likely.” – Bloomberg

Le­setja Kganyago

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