South Africa Rate-Hike Bets Jump on Upside Risks to Inflation

(Bloomberg) -- Traders raised bets that South Africa’s central bank will raise interest rates in November after it warned of upside risks to its inflation outlook. 

Forward-rate agreements starting in two months, used to speculate on borrowing costs, are now pricing in almost 40 basis points of tightening by year-end. Less than a week ago, those contracts were predicting just an 80% probability of a quarter-point increase, before the South African Reserve Bank said underlying price pressures may be building.

The bank prefers to anchor inflation expectations close to the 4.5% midpoint of its target range. The inflation rate climbed for the first time in three months in August to 4.9% from a year earlier, and price-growth expectations, as measured by the five-year breakeven rate, are now at the highest since May 2019.

“Delaying the lift-off could see the monetary policy authorities playing catch-up with inflation, potentially destabilizing the relatively well-anchored inflation expectations,” the central bank said last week in its six-monthly Monetary Policy Review. The benchmark rate, currently at a record low 3.5%, must move toward its neutral level over the medium term to reduce stimulus and keep price growth contained, it said. 

The comments were “taken out of context, as in our view, the Monetary Policy Review was simply stating the obvious, if one considers that it is a backward-looking document that mostly summarizes the past three MPC meetings and occasionally comments on the medium-term outlook,” Barclays Bank Plc economists including Michael Kafe said in an emailed note. It only sees the bank raising borrowing costs in mid-2022.   

The implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide, indicates a 25-basis point increase in the final quarter of this year. The November meeting is the only one remaining this year.

If one or more member of the MPC votes for a rate hike next month, that would be the first time since November 2018, when three of the then-six member committee preferred a 25 basis-point increase and the rest an unchanged stance. The final decision was to hike to 6.75%.

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