South Africa Set for Rate Hike as Inflation Flares: Day Guide

Lesetja Kganyago. Photo by Waldo Swiegers /Photographer: Waldo Swiegers/Blo

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(Bloomberg) — South Africa’s central bank appears set to raise borrowing costs for a second consecutive meeting, as fresh price pressures emerge from intensified fighting in the Middle East.

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Annual inflation accelerated to 5% in June, overshooting expectations and moving further above policymaker’s 3% target. As a result, traders hardened bets that Governor Lesetja Kganyago’s monetary policy committee will lift interest rate by 25 basis points to 7.25% on Thursday. That matches the forecast of 17 of 20 economists in a Bloomberg survey. The rest expect a hold.

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The MPC meeting coincides with escalating hostilities between the US and Iran, triggering concerns that persistently higher oil prices could add to inflationary pressures. Crude has risen roughly 30% since the US and Israel attacked Iran on Feb. 28.

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Mike van der Westhuizen, portfolio manager at CAM Asset Management, expects the decision to be finely balanced, with a 60% chance of a 25-basis-point hike.

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He said Kganyago’s priority will be cooling inflation expectations, which rose to 3.9% in the second quarter, near the top of the central bank’s one percentage point tolerance band either side of its inflation goal.

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“On the tip of the balance on the scale here, is that they’ll want to keep those inflation expectations in check,” Van der Westhuizen said. “There is no doubt that inflation expectations will remain sticky as long as inflation continues rising.”

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On top of the energy-market threat from the conflict, food prices are also under pressure via high fertilizer costs, adding to the risks posed by an El Nino weather event, said Lerato Ntuli, economist at Anchor Capital who sees a quarter-point hike.

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“If sustained, these higher input costs could discourage planting activity, reduce the area under cultivation, constrain agricultural output and ultimately place upward pressure on food prices,” Ntuli said.

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On the other hand, Investec economist Tertia Jacobs argues that the moment calls for a more balanced assessment of the risks which backs her out-of-consensus call that the MPC will stay on hold.

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The reserve bank’s pre-emptive hike in May gives officials the opportunity to wait, while a relatively strong rand will support the case for a pause.

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“It’s not like they are behind the curve,” she said. “The rand is behaving very well. It is stronger than what they’ve plugged into their model. The carry trade is supporting it; that’s an important dynamic as well.”

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Still, the headwinds from the war mean the central bank’s next meeting in September will be live for a move.

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“One cannot say that September does not have a probability of a rate hike,” Jacobs said.

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—With assistance from Simon Lee.

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