S. Africa Rate Dilemma Deepens as Recession Stokes Rand, CPI
(Bloomberg) -- South Africa’s unexpected recession deepened the policy dilemma for its central bank, which is caught between calls to defend a currency that’s stoking inflation expectations and finding ways to support the waning economy.
A day after Africa’s most-industrialized economy revealed it unexpectedly shrank in the three months through June, the rand on Wednesday extended a slump to its weakest level in more than two years against the dollar. While that pushed inflation expectations to the highest since June, the central bank knows raising interest rates in response risks knocking the chances of economic recovery
The central bank will probably keep its key rate at at 6.5 percent Sept. 20 “amid the now more-stagflationary economic backdrop,” Zaakirah Ismail and Shireen Darmalingam, strategists at Standard Bank Group Ltd., said in an emailed note.
The South African Reserve Bank’s mandate is to target inflation in a band of 3 percent to 6 percent and it prefers this anchored at the midpoint. Consumer-price growth quickened to a 10-month high of 5.1 percent in July, pushed by higher gasoline costs and a weaker currency. The central bank will wait for broader price increases in the economy before tightening policy, even as risks that the Monetary Policy Committee had previously warned about come true, Governor Lesetja Kganyago said in an interview with Bloomberg last month.
“The SARB should continue its credible and orthodox response by focusing on inflation expectations and pass-through, rather than using up reserves unnecessarily, which won’t be appreciated by investors,” Esther Law, the senior investment manager for emerging-market debt at Amundi Asset Management in London, said in an emailed response to questions.
Money-market rates underscore the central bank’s credibility. Even after the rand’s slump this week, forward-rate agreements are pricing in less than a 60 percent chance of a 25 basis-point rate increase at the next Monetary Policy Committee meeting.
The contraction postpones chances of an interest-rate increase soon, Maarten Ackerman, a portfolio manager at Citadel Investment Services, said by phone. “The first hike will probably be in 2019, taking into consideration the weak economy and also, the inflation is not at the upper end yet.”
The central bank is mindful of the very weak growth environment, said Natalie Rivett, a senior analyst for emerging markets at Informa Global Markets Ltd.
“It may be reluctant to hike rates yet, though the option is on the table,” she said in an emailed response to questions.
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