Hawkish Turn at South Africa's Central Bank May Be Rand's Savior

(Bloomberg) -- It’s been another miserable week for South Africa’s rand, but policy support may be coming closer, if money-market bets are anything to go by.

The currency slumped more than 2 percent on Thursday as the South African Reserve Bank left its benchmark rate unchanged at 6.5 percent, a level Governor Lesetja Kganyago described as “accommodative,” while warning that inflation pressures are increasing. The hawkish tone of his statement convinced traders that the central bank may start hiking rates this year already, a move which would support the rand as other emerging-markets and developed nations tighten policy.

Hawkish Turn at South Africa's Central Bank May Be Rand's Savior

Forward-rate agreements, used to speculate on interest rates, are pricing in 25 basis points of rate increases by January, and at least one more by the end of next year. Rates on the contracts rose after Thursday’s Monetary Policy Committee statement.

“Inflation expectations will likely be a key driver of monetary tightening,” Zaakirah Ismail, an analyst at Standard Bank Group Ltd. in Johannesburg, said in a client note Friday. “Should the inflation trajectory meet the SARB’s forecasts, a hiking cycle may very well start sooner than we currently expect.”

The rand gained 0.6 percent to 13.4577 per dollar by 10:51 a.m. in Johannesburg, paring its decline this week to 1.4 percent. The currency of Africa’s most-industrialized economy has slumped 12 percent since the beginning of the second quarter amid an emerging-market sell-off sparked by rising U.S. rates and increasing trade tensions.

©2018 Bloomberg L.P.