Falling inflation expectations may have come at the perfect time for South African Reserve Bank (Sarb) governor Lesetja Kganyago, who is caught in a rate-increase cycle at a time when ratings companies have told the country to boost growth or have its credit rating cut to junk.
The five-year breakeven rate, a measure of bond investors’ price expectations, has fallen 39 basis points to 7.06% since the Reserve Bank’s monetary policy committee left its benchmark repurchase rate unchanged at 7% on May 19, compared with a 13 basis-point increase in emerging-market peer Mexico. The Sarb said last month inflation will return to its 3% to 6% target band in the third quarter of next year, three months sooner than it projected earlier.
While Africa’s most industrialised economy was spared a downgrade to junk by two credit rating companies in the last week, S&P Global Ratings and Fitch Ratings warned they could still cut the nation’s debt assessment if the economy doesn’t recover.
Finance Minister Pravin Gordhan and President Jacob Zuma have met with business, labour leaders and investors to come up with plans to boost output, which contracted by an annualised 1.2% in the first quarter. Tightening monetary policy further to tackle inflation could limit the impact of efforts to bolster growth.
“Given the fact that the economy is also quite weak, it probably gives them a little bit of room to breathe,” Dennis Dykes, chief economist at Nedbank in Johannesburg, said by phone on Thursday. “Where they get the chance and where it’s not seen as being soft, I think they would take that opportunity’’ to support growth, he said.
While the worst drought in more than a century pushed food inflation to 11.3% in April, futures for South African white maize, used as a staple, have declined 8.6% since reaching a record on January 21. The rand, which the MPC says is a key risk to its inflation outlook, gained 5.8% against the dollar this month.
“The outlook for inflation, given food and given the rand, looks a lot better than what it did at the last MPC meeting,” Wayne McCurrie, head of wealth portfolio management Momentum Wealth in Pretoria, said by phone.
The rand weakened 0.7% to R14.8412 per dollar as of 18:00 in Johannesburg on Thursday. Yields on rand-denominated government bonds due in December 2026 were little changed at 9.04%.
Forward-rate agreements starting in six months, used to speculate on borrowing costs, show investors have pared expectations and are now pricing in 31 basis points of rate increases this year, compared with 54 basis points on May 30. The Sarb has raised its benchmark rate by 125 basis points to 7% since July. It next decides on rates on July 21.
While S&P and Fitch called for the implementation of plans to support South Africa’s economy, they said the independence of institutions like the Reserve Bank, and its commitment to price stability, contributed to their decisions to not downgrade the nation’s debt.
Given that the MPC’s forecast shows the inflation rate falling back into its target next year and that the committee has increased borrowing costs twice this year, it can afford to hold off further tightening without compromising its inflation-fighting credentials, Kevin Lings, chief economist at Johannesburg-based Stanlib Asset Management, said.
“They may not frame it as, ‘we are supporting the growth initiative of South Africa’,” Lings said by phone. “The risk with framing it that way is that you are interpreted as you are going soft on inflation.”