South Africa May Move Rate Focus to Recession Risk

Johannesburg, Capital Markets in Africa: South Africa’s rate-hiking cycle may be coming to an end amid the threat of the country’s first recession in seven years.

After increasing the benchmark rate six times since the start of 2014, policy makers in Africa’s only Group of 20 economy are poised to keep it unchanged this week as a stronger currency gives them room to focus on the risks to growth. Those headwinds include weak export demand, the worst drought in more than a century, low commodity prices, and most recently, the U.K.’s vote to quit the European Union.

“I think it’s the end of the hiking cycle,” Lesiba Mothata, chief economist at Investment Solutions in Johannesburg, said by phone on Monday. “I think the conversation in the committee should be that of pausing and a concerted effort and time to be given in the discussion around easing.”

The economy will probably expand 0.1 percent this year, the least since a contraction in 2009, and the risks of a recession are significant, the International Monetary Fund said this month. The South African Reserve Bank, which has consistently said it’s in a policy-tightening cycle, kept the rate at 7 percent at the last meeting after increasing it 25 basis points in March.

While inflation has exceeded the bank’s 3 percent to 6 percent target band since the start of the year, price increases have generally been less than estimated since March, helped by a stronger rand.

Recession Risk
All 25 economists in a Bloomberg survey said the Monetary Policy Committee will keep its benchmark repurchase rate unchanged on Thursday after tightening borrowing costs by 125 basis points since last July. Forward-rate agreements starting in five months, used to speculate on borrowing costs over the period, show traders are pricing in a 68 percent probability that the MPC will increase borrowing costs by another 25 basis points by the end of the year.

The five-year break-even rate, a measure of bond investors’ inflation expectations, fell 72 basis points since the last MPC meeting on May 19 to 6.73 percent, as the rand gained 10 percent against the dollar. That compares with a 39 basis point increase in emerging-market peer Mexico. A government report on Wednesday showed inflation quickened to 6.3 percent last month from 6.1 percent in May.

“You have the rand which is trading surprisingly stable, post-Brexit, and we also have a couple of inflation prints that have undershot expectations and we have evidence that domestic demand is very weak and faltering,” Peter Worthington, an economist at Barclays Plc, said by phone from Cape Town on Monday. “There’s a growing risk that rates may have actually peaked.”

Central banks in three key African economies have followed divergent policy paths since the start of the year. The Bank of Ghana left rates unchanged at 26 percent for a fourth consecutive meeting on Monday. In Kenya, the central bank cut its benchmark rate by 100 basis points to 10.5 percent in May and will probably keep rates unchanged on July 25, according to a Bloomberg survey. The Central Bank of Nigeria kept its key rate at 12 percent two months ago and three of nine economists surveyed forecast it will increase borrowing costs on July 26.

Inflation Target
The MPC projects inflation will return to its target by the third quarter of next year. Price-growth expectations remain uncomfortably high and the risks to the outlook include the rand, which is sensitive to domestic political developments and changes in U.S. monetary policy, Deputy Governor Daniel Mminele said on July 7.

The rand strengthened 0.4 percent to 14.2729 per dollar by 4:52 p.m. in Johannesburg on Wednesday. Yields on rand-denominated government bonds due December 2026 fell three basis points to 8.79 percent.

“The rand is fairly behaved,” Colen Garrow, chief economist at Lefika Securities in Johannesburg, said by phone on Tuesday. “We are probably going through a sideways movement on interest rates now, and the next move may in fact be lower.”