(Bloomberg) — Traders raised bets that the South African Reserve Bank will extend its interest rate-cutting cycle on Thursday after inflation unexpectedly eased.
Consumer prices rose an annual 3.3% in August from 3.5% in the prior month, Pretoria-based Statistics South Africa said in a statement on Wednesday. Only two of 13 economists in a Bloomberg survey expected price growth to slow.
Following the news, traders added to bets that the central bank’s monetary policy committee will lower interest rates on Thursday. Forward-rate agreements used to speculate on borrowing costs are pricing in a 60% chance of a 25-basis-point cut, compared with a 48% probability before the inflation data.
The rand weakened as much as 0.4% against the dollar, while the yield on benchmark 2035 government rand bonds fell five basis points to the lowest in more than seven years.
Razia Khan, Standard Chartered Plc’s chief economist for Africa and the Middle East, said the outcome was “a game changer.” She, along with most other analysts in a separate survey conducted before Wednesday’s data release, had expected the monetary policy committee to keep the key rate at 7%. She has since changed her view to a 25 basis point cut.
“Suddenly, the September meeting is looking very live,” she said. “This increases significantly the likelihood of near-term SARB easing, although the consensus was for inflation to keep rising to year-end.”
Still, the MPC may remain reluctant to lower rates to avoid undermining its new inflation goal.
In July, the MPC announced it now prefers inflation to settle at the bottom of its target band of 3% to 6%, rather than the midpoint. David Fowkes, a panel member and adviser to the governors, said it may take three years to anchor expectations at that level.
Average inflation expectations two years ahead — the MPC’s preferred gauge for decision-making on interest rates — fell to 4.2% in the third quarter from 4.5% previously, the lowest level since 2005.
Africa Economist for Bloomberg Economics Yvonne Mhango expects inflation to quicken to 4.2% by year end and remain there through 2026.
Softer food and fuel inflation were the main drivers of the surprise outcome. Annual price growth for food & non-alcoholic beverages subsided to 5.2% from 5.7% in July and fuel prices declined 5.7% from -5.5%, the agency said.
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–With assistance from Simon Lee, Ana Monteiro and Robert Brand.
(Updates with Standard Chartered forecast in paragraph five. An earlier version corrected the size and scope in paragraph one.)
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