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.
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